Index Mutual Fund Ownership and Financial Reporting Quality

51 Pages Posted: 30 Jul 2022

See all articles by Ahmed S. Baig

Ahmed S. Baig

Boise State University - College of Business and Economics

Jared DeLisle

Utah State University - Huntsman School of Business

Gulnara R. Zaynutdinova, Ph.D.

West Virginia University, Department of Finance

Abstract

We examine the relation between index mutual fund ownership and financial reporting quality measured by the propensity for fraudulent statements (Beneish’s (1999) M-Score) and accounting aggressiveness (discretionary accruals). We find that index mutual fund ownership is negatively related to both measures of financial reporting quality, suggesting that index mutual funds provide a monitoring role with respect to financial reporting quality. These relations are muted when firms employ one of the four largest auditing firms. The evidence is consistent with the notion that resource-constrained index mutual funds, however, relinquish their monitoring role to Big 4 auditing firms. The monitoring efforts by index mutual funds have an economic impact additional to that performed by active mutual funds. Our results are robust to controlling for a spurious relation between index mutual fund ownership and financial reporting quality.

Keywords: index mutual fund ownership, corporate governance, fraud, financial reporting, financial reporting aggressiveness, discretionary accruals

Suggested Citation

Baig, Ahmed and DeLisle, R. Jared and Zaynutdinova, Gulnara R., Index Mutual Fund Ownership and Financial Reporting Quality. Available at SSRN: https://ssrn.com/abstract=4177104

Ahmed Baig

Boise State University - College of Business and Economics ( email )

Boise, ID 83706
United States

R. Jared DeLisle (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
4357972310 (Phone)

Gulnara R. Zaynutdinova

West Virginia University, Department of Finance ( email )

John Chambers College of Business and Economics
Morgantown, WV 26506
United States

HOME PAGE: http://https://business.wvu.edu/

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