Institutional Investors, Long-Term Investment, and Earnings Management
Author | : Brian J. Bushee |
Publisher | : |
Total Pages | : 44 |
Release | : 2011 |
ISBN-10 | : OCLC:1290246577 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Institutional Investors, Long-Term Investment, and Earnings Management written by Brian J. Bushee and published by . This book was released on 2011 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the influence of institutional investors on the incentives of corporate managers to alter long-term investment for earnings management purposes. Many critics argue that the short-term focus of institutional investors encourages managers to sacrifice long-term investment to meet current earnings targets. Others argue that the large stockholdings and sophistication of institutions allow them to fulfill a monitoring role in preventing such myopic investment behavior. I examine these competing views by testing whether institutional ownership affects Ramp;D spending for firms that could reverse a decline in earnings with a reduction in Ramp;D. The results indicate that managers are less likely to cut Ramp;D to reverse an earnings decline when institutional ownership is high, implying that institutions typically serve a monitoring role relative to individual investors. However, I find that a high proportion of ownership by institutions exhibiting ?transient? ownership behavior (i.e., high portfolio turnover and momentum trading) significantly increases the probability that managers reduce Ramp;D to boost earnings. These results indicate that high turnover and momentum trading by institutional investors can encourage myopic investment behavior when such institutional investors have extremely high levels of ownership in a firm; otherwise, institutional ownership serves to reduce pressures on managers for myopic investment behavior.