Characteristics of institutional investors and discretionary accruals

Cheng-shing Cheng, Austin Reitenga

Research output: Journal article publicationJournal articleAcademic researchpeer-review

23 Citations (Scopus)


Purpose – The purpose of this paper is to examine the differential effects of institutional non-blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretionary accruals. Design/methodology/approach – This paper also proposes that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (EP) (i.e. the gap between target earnings and pre-managed earnings). In particular, it believes that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of EPs is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of EP is there. The sample into three EP conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings is grouped. Consistent with the expectations, the paper finds that NONB stimulates earnings management, but only when EP is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings. Findings – This paper also predicts that ACTB will need to exercise their monitoring power only when EP is strong. The results confirm this prediction, but only when there is strong pressure to increase earnings. When there is strong pressure to decrease earnings, inconclusive evidence regarding the effect of ACTB is found. This may imply that ACTB are conservative since they appear to be more likely to limit income-increasing accruals than they are to limit income-decreasing accruals. Originality/value – This paper's contributions to the literature are twofold: the paper shows that the characteristics of institutional investors (INSTs) should be considered when examining the relationship between INSTs and earnings management; the paper shows that the direction and level of EP should be considered when evaluating the relationship between INSTs and earnings management.
Original languageEnglish
Pages (from-to)5-26
Number of pages22
JournalInternational Journal of Accounting & Information Management
Issue number1
Publication statusPublished - 26 Jun 2009
Externally publishedYes


  • Corporate governance
  • Earnings
  • Investors

ASJC Scopus subject areas

  • Management Information Systems
  • Accounting
  • Economics, Econometrics and Finance(all)

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