Earnings management, institutional ownership and investment efficiency: evidence from a developing country

Abstract

Purpose This study investigates the effect of earnings management (EM) and institutional ownership (IO) on investment efficiency (IE). It also investigates the effect of IO, as a governance mechanism, on the relation between EM and IE. Design/methodology/approach This study examines a sample of Egyptian firms listed on EGX100 during the period 2014–2019. The data are collected manually from firms’ annual reports and governance reports obtained from Egypt for Information Dissemination Company. We depend on the t-test, Pearson correlation, and OLS regression to test our hypotheses. Findings The results revealed a negative relationship between EM and IE. In contrast, IO has a significant and positive effect on IE. The results also show that IO mitigates the negative implications of EM for IE. Additionally, we find robust evidence for the governance role of pressure-insensitive IO, as it has a positive effect on IE and on mitigating the negative effects of EM on IE. Originality/value To our knowledge, this is the first study to examine the effect of IO as a governance mechanism on the relationship between EM and IE. The results of this study can be of interest to investors, regulators, and policy-makers due to highlighting the potential implications of EM and IO for firms’ investment decisions in Egypt–one of the important emerging markets in the Middle East and Africa.