Population Aging, Retail Investor Characteristics and Corporate Earnings Management

Abstract

We study how retail investor characteristics affect earnings quality, exploiting the well-documented home bias in equity holdings and the cross-sectional, county-level differences in US age demographics to explore how an aging population affects corporate earnings management. To do so, we use previous evidence of a positive relationship between investor age and holding period, and a negative relationship between investor holding period and earnings management to argue that senior investors will reduce managers’ myopic investment behaviors and, ultimately, their earnings management behavior. Consistent with our prediction, we find that an increase in the fraction of seniors residing in a county is associated with a reduction in both accrual-based and real-activity earnings management of firms headquartered in the area. Taken together, our results provide strong evidence that retail investor characteristics impact corporate earnings quality.

Keywords: Population aging; Retail investor characteristics; Earnings management; Equity home bias; Local seniors

JEL Classification: G11; M41; P23