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The Effects of Institutional Ownership and Monitoring : Evidence from Financial Reporting Practices

We examine the relation between institutional ownership and financial reporting practices. We find a positive relation between ownership by institutions with short investment horizons (transient institutions) and both the use of discretionary accruals and the likelihood and severity of financial restatements. Non-transient ownership is negatively related to the use of discretionary accruals but unrelated to restatement activity. Even ownership by activist institutions does not attenuate restatement activity. We also observe transient institutions selling prior to restatements. These results suggest that the presence of short-horizon institutional investors creates strong incentives to manage earnings and that institutional monitoring does not mitigate these incentives.