Influence or Preference? A New Look at Institutional Ownership and Earnings Management

40 Pages Posted: 15 May 2020

See all articles by Jun Wang

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Qijian Wang

Lingnan College, Sun Yat-sen University

Date Written: February 2, 2018

Abstract

Prior literature finds that earnings management is negatively correlated with institutional ownership. The question is whether institutional investors drive down earnings management of the firms they invest in, or they choose firms with lower earnings management. In this paper, we use the regression discontinuity design around Russell 1000 and 2000 indexes reconstruction to obtain an exogenous variation in institutional ownership. We find that institutional investors do not drive down earnings management after they become shareholders. Instead, institutions choose firms with lower earnings management level when they make investment decisions. To further support the preference hypothesis, we add measures of institution preference in the panel regression and find that the negative relation between institutional ownership and earnings management disappears.

Keywords: Corporate Governance, Institutional Ownership, Earnings Management, Institutional Preference

JEL Classification: G23, G38, M41

Suggested Citation

Wang, Jun and Wang, Qijian, Influence or Preference? A New Look at Institutional Ownership and Earnings Management (February 2, 2018). Available at SSRN: https://ssrn.com/abstract=3580900 or http://dx.doi.org/10.2139/ssrn.3580900

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Qijian Wang (Contact Author)

Lingnan College, Sun Yat-sen University ( email )

No 135 Xingang W Road
Guangzhou, 510275
China

HOME PAGE: http://lingnan.sysu.edu.cn/en/faculty/wangqijian

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