A Study of the Relationship between Institutional Ownership and Earnings Quality
Date Issued
2009
Date
2009
Author(s)
CHEN, CIAO-LING
Abstract
Corporate control mechanisms include both internal mechanisms and external mechanisms. Outside shareholder monitoring is one of the external mechanisms (Bushman and Smith 2001). Among those outside shareholders, institutional investors have the resources and incentives to monitor and influence management decisions. McConnell and Servaes (1990), Chung et al. (2002), Velury and Jenkins (2006) represent research that report institutional investors could constrain the self-serving behavior of corporate managers, and help improve corporate governance. This study examines the relationship between institutional ownership and earnings quality in Taiwan, and uses the absolute value of discretionary accruals, the quality of accruals, earnings informativeness as proxies for earnings quality. This study investigates both the linear and nonlinear relation between institutional ownership and earnings quality. In additional analysis, this study partitions institutional investors into three categories: government, financial institutions and trust funds, foreign institutional investors to investigate the relation between different kinds of institutional investors and earnings quality. Also, in additional analysis, this study uses discretionary accruals as dependent variables, and partitions it into two groups: positive value of discretionary accruals, negative value of discretionary accruals to examine its relation with institutional ownership. This study applies the modified Jones model (including a constant) and performance-matched modified Jones model (including a constant) to estimate discretionary accruals, and uses the absolute value of discretionary accruals as proxies for earnings quality. This study applies the model from Dechow and Dichev (2002) to measure the quality of accruals. As to earnings informativeness, this study refers to the methods used by Lyon et al. (1999) to form reference portfolios based on market value of equity and book-to-market ratios to calculate cumulative abnormal returns, and regresses cumulative abnormal returns on current period earnings, and uses previous year’s market value of equity as scaling factor to measure ERCs. The empirical results are summarized as follows:.There is statistically significant linear relationship exists between institutional ownership and the quality of accruals..There is statistically significant nonlinear relationship exists between institutional ownership and the quality of accruals, earnings informativeness..There is statistically significant nonlinear relationship exists between government ownership, financial institutions and trust funds ownership and the quality of accruals. There is also statistically significant nonlinear relationship exists between government ownership, foreign institutional ownership and earnings informativeness..There is no statistically significant linear and nonlinear relationship exists between institutional ownership and discretionary accruals, the absolute value of discretionary accruals.
Subjects
institutional investors
earnings quality
discretionary accruals
quality of accruals
earnings informativeness
corporate governance
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