Does the presence of institutional investors influence accruals management? Evidence from Australia

Hsu, Grace C.-M. and Koh, Ping-Sheng (2005) Does the presence of institutional investors influence accruals management? Evidence from Australia. Corporate Governance: An International Review, 13 6: 809-823. doi:10.1111/j.1467-8683.2005.00472.x

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Author Hsu, Grace C.-M.
Koh, Ping-Sheng
Title Does the presence of institutional investors influence accruals management? Evidence from Australia
Journal name Corporate Governance: An International Review   Check publisher's open access policy
ISSN 0964-8410
Publication date 2005-11
Sub-type Article (original research)
DOI 10.1111/j.1467-8683.2005.00472.x
Volume 13
Issue 6
Start page 809
End page 823
Total pages 15
Editor C. Mallin
Place of publication Oxford, U.K.
Publisher Blackwell Publishing
Collection year 2005
Language eng
Subject 1501 Accounting, Auditing and Accountability
729900 Other Economic Issues
1503 Business and Management
350100 Accounting, Auditing and Accountability
Formatted abstract
Recent debates on the corporate governance role of institutional investors have centred around whether they monitor their portfolio firms (exercise voice) or vote with their feet (exit). We examine these competing views in the context of how institutions' voice vs exit role, proxied by institutional ownership levels, is associated with their portfolio firms' earnings management in multiple settings. We extend Koh (2003, The British Accounting Review, 35, 105–128) by examining the effect of both short-term and long-term oriented institutional ownership on the extent of earnings management by portfolios firms with different incentives for earnings management. Specifically, we expect that the non-linear relation between institutional ownership and earnings management found in Koh (2003) is more likely to be present for portfolio firms with stronger incentives to meet/beat earnings thresholds. Our results suggest that transient and long-term oriented institutions co-exist and have differential effects on portfolio firms' earnings management. Transient institutions are associated with upward accruals management, while long-term oriented institutions constrain such upward accruals management for portfolio firms that have strong incentives to do so (specifically, firms with non-discretionary earnings below prior year earnings). This suggests long-term oriented institutions can act as a corporate governance mechanism to mitigate aggressive earnings management. Overall, we find that the association between institutional ownership and earnings management is not systematic across all firms and is context dependent, suggesting complex associations between institutional ownership and earnings management strategies exist. 
Keyword Institutional investors
Discretionary accruals
Earnings management
Corporate governance
Q-Index Code C1

Document type: Journal Article
Sub-type: Article (original research)
Collections: Excellence in Research Australia (ERA) - Collection
2006 Higher Education Research Data Collection
UQ Business School Publications
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Citation counts: TR Web of Science Citation Count  Cited 25 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 50 times in Scopus Article | Citations
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Created: Fri, 21 Apr 2006, 21:49:42 EST