Two Tales of Monitoring: Effects of Institutional Cross-Blockholding on Accruals

Abstract

Over 70% of publicly traded U.S. firms are interconnected through institutional investors’ cross-blockholding. We study the implications of such emerging ownership patterns for financial reporting, and document a robust, negative association between accruals and institutional cross-blockholding. We demonstrate causal inference using financial institution mergers as exogenous shocks to cross-blockholding. Results from additional analyses support both the product market monitoring and the financial reporting monitoring hypotheses. Finally, we show that the increase in institutional cross-blockholding strengthens the association between accruals and cash flows over the past 35 years.

Keywords: Institutional blockholders; Accruals; Cross-holding; Monitoring; Financial reporting quality

JEL Classification: M40, G2, G23, G34