Taking a Long View: Investor Trading Horizon and Earnings Management Strategy

47 Pages Posted: 11 Jan 2017 Last revised: 12 Apr 2017

See all articles by Yeejin Jang

Yeejin Jang

UNSW Australia Business School, School of Banking and Finance

Kyung Yun (Kailey) Lee

Hankuk University of Foreign Studies

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2017

Abstract

This paper studies how the investment horizon of institutional investors affects firms’ earnings management strategies. We find that firms largely held by long-term investors are more likely to manage earnings through adjusting operational decisions than through manipulating accruals. The impact of an investor’s trading horizon on real activities manipulation is stronger when long-term investors face high performance pressures with low fund flows and high market uncertainty and when they have strong influence on managers with large holdings. We further document that adverse future consequences of operational adjustment are relatively less severe for the firms with long-term investors than for those with short-term investors. Overall, the evidence suggests that firms choose earnings management methods to meet earnings expectations of institutional investors who have different earnings target windows. Our identification strategy exploits the Russell 2000 Index inclusions as an instrumental variable for the investor horizon and confirms our results are robust to endogeneity concerns.

Keywords: Investor horizon, Institutional investors, Earnings management, Accrual-based earnings management, Real activities manipulation

JEL Classification: M41, G23, G30, G31

Suggested Citation

Jang, Yeejin and Lee, Kyung Yun, Taking a Long View: Investor Trading Horizon and Earnings Management Strategy (April 10, 2017). Available at SSRN: https://ssrn.com/abstract=2897169 or http://dx.doi.org/10.2139/ssrn.2897169

Yeejin Jang (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Kyung Yun Lee

Hankuk University of Foreign Studies ( email )

Korea, Republic of (South Korea)

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