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Influence or Preference? A New Look at Institutional Ownership and Earnings Management

by 1 and 2,*
1
Baruch College, City University of New York, New York, NY 10010, USA
2
Lingnan College, Sun Yat-sen University, Guangzhou 510275, China
*
Author to whom correspondence should be addressed.
Academic Editor: Lester Johnson
Businesses 2021, 1(3), 151-167; https://doi.org/10.3390/businesses1030012
Received: 3 September 2021 / Revised: 9 October 2021 / Accepted: 11 October 2021 / Published: 15 October 2021
Prior literature finds that earnings management is negatively correlated with institutional ownership. The question is whether institutional investors drive down earnings management of the firms they invest in, or they choose firms with lower earnings management. In this paper, we use the instrument variable design of the Russell 1000 and 2000 indices reconstruction to obtain an exogenous variation in institutional ownership. We find that institutional investors do not drive down earnings management. Instead, institutions choose firms with lower earnings management when they make investment decisions. To further support the preference hypothesis, we add measures of institution preference in the panel regression and find that the negative relation between institutional ownership and earnings management disappears. View Full-Text
Keywords: corporate governance; institutional ownership; earnings management; institutional preference corporate governance; institutional ownership; earnings management; institutional preference
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MDPI and ACS Style

Wang, J.; Wang, Q. Influence or Preference? A New Look at Institutional Ownership and Earnings Management. Businesses 2021, 1, 151-167. https://doi.org/10.3390/businesses1030012

AMA Style

Wang J, Wang Q. Influence or Preference? A New Look at Institutional Ownership and Earnings Management. Businesses. 2021; 1(3):151-167. https://doi.org/10.3390/businesses1030012

Chicago/Turabian Style

Wang, Jun, and Qijian Wang. 2021. "Influence or Preference? A New Look at Institutional Ownership and Earnings Management" Businesses 1, no. 3: 151-167. https://doi.org/10.3390/businesses1030012

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