Do Passive Investors Demand High Earnings Quality? Evidence from Natural Experiment
Posted: 30 Jul 2018
Date Written: July 28, 2018
In this paper, we examine the effect of passive institutional investors on firms’ earnings quality by exploiting the variation in passive ownership around Russell 1000/2000 index cutoff. To get a comprehensive understanding, we use four sets of earnings quality proxies- properties of earnings, investor responsiveness to earnings, external indicators of earnings misstatements, and real earnings management. We find that passive investors improve earnings quality using all four above-mentioned sets of earnings quality proxies. We find this effect to be more pronounced in firms with low active institutional holdings. Furthermore, we find firms with higher passive institutional ownership undertake relatively more long-term investments.
Keywords: Passive Investors, Earnings Quality, Real Earnings Management
JEL Classification: G23, M41
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