The Governance Role of Institutional Investors and Outsider Directors on the Properties of Management Earnings Forecasts

44 Pages Posted: 27 Jan 2004

See all articles by Bipin B. Ajinkya

Bipin B. Ajinkya

University of Florida - Fisher School of Accounting

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management

Partha Sengupta

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: October 2003

Abstract

This paper investigates the relation between institutional ownership and board of directors' composition and the properties of management earnings forecasts. A firm's optimal disclosure policy is determined by a trade-off between costs and benefits of disclosure. Managers acting in their self-interest may have incentives to distort disclosure policy. Governance mechanisms, to the extent they are effective in protecting the interests of the providers of capital, should mitigate these distortions. We find evidence that institutional ownership and outsider directors are favorably associated with the properties of earnings forecasts. Firms with greater institutional ownership and outside directorship are more likely to issue a forecast and do so consistently. Further, these forecasts tend to be more specific and accurate. The governance measures also mitigate managers' tendency to issue optimistic forecasts.

JEL Classification: M41, M45, G32, G34

Suggested Citation

Ajinkya, Bipin B. and Bhojraj, Sanjeev and Sengupta, Partha, The Governance Role of Institutional Investors and Outsider Directors on the Properties of Management Earnings Forecasts (October 2003). 14th Annual Conference on Financial Economics and Accounting (FEA). Available at SSRN: https://ssrn.com/abstract=488107 or http://dx.doi.org/10.2139/ssrn.488107

Bipin B. Ajinkya (Contact Author)

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-392-8864 (Phone)

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Accounting
Ithaca, NY 14853
United States
607-255-4069 (Phone)
607-254-4590 (Fax)

Partha Sengupta

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Mail Stop 6E-3
Washington, DC 20219-0001
United States
202-679-5525 (Phone)

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