The Effects of Institutional Ownership and Monitoring: Evidence from Financial Restatements
32 Pages Posted: 7 Feb 2006
Date Written: January 2006
We find a positive relation between ownership by institutions with active strategies and short investment horizons (transient institutions) and the occurrence and magnitude of financial restatements. Even ownership by institutions with enhanced incentives to monitor does not attenuate restatement activity. Looking at discretionary accruals, which are more easily monitored than practices that might result in a restatement, we again find an increased usage associated with transient institutions though, in this case, ownership by other institutions attenuates their usage. These results suggest that the presence of transient institutional investors creates strong incentives to manage earnings and that institutional monitoring does not mitigate these incentives.
JEL Classification: M41, M43, G34, G32, G23, G24
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