Is Institutional Ownership Associated with Earnings Management and the Extent to Which Stock Prices Reflect Future Earnings?

32 Pages Posted: 17 May 1999

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia Business School

Mohan Venkatachalam

Duke University - Fuqua School of Business

James J. Jiambalvo

University of Washington - Michael G. Foster School of Business

Date Written: March 1999

Abstract

Articles in the financial press suggest that institutional investors are overly focused on short-term profitability leading mangers to manipulate earnings fearing that a short-term profit disappointment will lead institutions to liquidate their holdings. This paper shows, however, that the absolute value of discretionary accruals declines with institutional ownership. The result is consistent with managers recognizing that institutional owners are better informed than individual investors, which reduces the perceived benefit of managing accruals. We also find that as institutional ownership increases, stock prices tend to reflect a greater proportion of the information in future earnings relative to current earnings. This result is consistent with institutional investors looking beyond current earnings compared to individual investors. Collectively, the results offer strong evidence that managers do not manipulate earnings due to pressure from institutional investors who are overly focused on short-term profitability.

JEL Classification: M41, M43, G29

Suggested Citation

Rajgopal, Shivaram and Venkatachalam, Mohan and Jiambalvo, James J., Is Institutional Ownership Associated with Earnings Management and the Extent to Which Stock Prices Reflect Future Earnings? (March 1999). Available at SSRN: https://ssrn.com/abstract=163433 or http://dx.doi.org/10.2139/ssrn.163433

Shivaram Rajgopal

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Mohan Venkatachalam (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

James J. Jiambalvo

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-9132 (Phone)
206-685-9392 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3,001
Abstract Views
9,346
rank
4,661
PlumX Metrics