Dr. S. Mehrani Dr. G. R. Karami M. MoradiH. Eskandar University of Tehran
Introduction Institutional owners have influence on companies because of their substantial investments; and can affect on companies, policies (include accounting and financial reporting procedures). Financial statements are main core of financial reporting process. Financial statements (especially income statement) are attended by investors. This study is designed to provide insights into the monitoring role of institutional investors by examining whether institutional ownership affects the quality of reported earnings. There are two theories about institutional owners. Under active monitoring theory these owners have more incentives to become active monitors. Because of high costs, only large investors would have the incentive to engage in active monitoring. This class of thought believes that institutional investors have relative advantage in information collection and analysis compare with other small investors. Another theory is private benefits. It means that institutional investors may not actively monitor their investees’ management activities due to the presence of free riders and lack of their own sufficient experience; rather they may compromise with the investee managers. Therefore, institutional owners might not engage to encourage managers to report high quality earnings. This thought implies a negative relationship between institutional ownership and earnings quality.
Research Hypotheses To assess the purpose of this study, two research hypotheses are chosen. These hypotheses are as follow: 1. There are a significant relationship between institutional ownership and earnings quality. 2. There are a significant relationship between concentrated institutional ownership and earnings quality.
Research Method On the basis of purpose and method this study is practical and descriptive research. In this study, we develop a multidimensional method of measuring earnings quality. That is for measuring the earnings quality, four regression models that measure the difference aspects of earnings quality (such as informative content of earnings, predictive value of earnings, accrual components of earnings, and timeliness of earnings) fits for this purpose. The sample for this study is comprised of 51 firms listed in Tehran Stock Exchange (TSE) during 9 years.
Results In this study, two theories (active monitoring theory and private benefits theory) about institutional ownership examined. Collectively, the results provide conflict evidences about the effect of institutional ownership on earnings quality. Based on these results, institutional ownership and concentrated institutional ownership are not significantly correlated with informative content of earnings and accrual components of earnings. Institutional ownership has negative effect on predictive value of earnings and so, negatively correlated with earnings quality. Therefore, private benefits theory is approved. But concentrated institutional ownership has positive effect on predictive value of earnings. Institutional ownership is positively correlated with reporting lag and so, negatively correlated with earnings quality. However, concentrated institutional ownership is not significantly correlated with reporting lag. Discussion and Conclusion The results show conflicting relationships between institutional investors and earnings quality. Therefore, these owners have different effects on various dimensions of earnings quality.
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