Institutional Ownership and Earnings Management in India

Abstract

Influence of institutional ownership has been hypothesised to efficiently monitor the managerial decisions especially discretionary role of managers in reporting earnings. The managers have been found to misrepresent the quality of earnings for a dividend declaration; new issue; takeovers and for affirming debt holders of their financial position. Panel data methodology focusing on firms listed in CNX 500 in National Stock Exchange empirically examines the impact of institutional ownership on the earnings management practices in India. Earnings management is measured using discretionary accounting accruals. Firms with higher institutional holdings are found to have higher earnings quality thus restricting managers from using their discretionary powers to report earnings. Institutional ownership has a negative relationship with earnings management for larger and matured firms. Growing firms are found to be having higher earnings management. Institutional investors monitor the firms and hence reduce aggressive earnings management practices within the firm. Foreign institutional ownership also has a negative relationship with earnings management.