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

See all articles by Blerina Bela Zykaj

Blerina Bela Zykaj

Clemson University - College of Business

Avishek Bhandari

University of Wisconsin Whitewater

Babak Mammadov

Clemson University - School of Accountancy & Legal Studies

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

Zykaj, Blerina Bela and Bhandari, Avishek and Mammadov, Babak, Birds of a Feather Flock Together: Institutional Investors with Disciplinary History and Financial Reporting (April 11, 2022). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3787722 or http://dx.doi.org/10.2139/ssrn.3787722

Blerina Bela Zykaj (Contact Author)

Clemson University - College of Business ( email )

225 Walter T. Cox Blvd.,
Clemson, SC 29634
United States

Avishek Bhandari

University of Wisconsin Whitewater ( email )

Whitewater, WI 53190
United States

Babak Mammadov

Clemson University - School of Accountancy & Legal Studies ( email )

Clemson, SC 29634
United States

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