Birds of a Feather Flock Together: Institutional Investors with Disciplinary History and Financial Reporting
63 Pages Posted: 23 Feb 2021 Last revised: 27 Dec 2022
Date Written: April 11, 2022
Abstract
This study examines the role of financial misconduct of institutional investors on financial reporting quality of investee firms. We find that firms held by institutional investors with disciplinary history (IDH) are more likely to engage in financial misreporting. Our analyses show that the results are not driven by institutional investor characteristics such as activism, monitoring, investment horizon, or portfolio size. Lastly, the impact of IDH is stronger in firms with higher incentives to engage in financial misreporting (i.e., firms that barely meet analysts’ expectations and CEOs with higher career concerns). The results are also stronger if the institution reports multiple disciplinary events, disciplinary event is recent, or disciplinary action is taken against the institutional investor company rather than just its affiliates. The results continue to hold after implementing various statistical tests to address potential endogeneity issues and alternative measures of financial misreporting.
Keywords: institutional investors, institutional investors with disciplinary history, financial misconduct, aggressive financial reporting, earnings quality
JEL Classification: G23, G32, M41
Suggested Citation: Suggested Citation