The article “Institutional monitoring and opportunistic earnings management” was written by Richard Chung, Michael Firth and Jeong-Bon Kim, published in the Journal of CORPORATE FINANCE on 22 June 2001.The Article examines the role of large institutional shareholding in monitoring , checking and influencing management decisions. Corporate manager may have incentive to increase or decrease reported profit by earnings management and this study majors focuses on the presence of large institutional shareholding and how they monitor manager’s opportunistic use of discretionary accruals
Earnings management is the act of intentionally altering the financial figures to obtain private benefit. Mostly manager tend to do this by using Discretionary Accounting …show more content…
If shareholdings are high, they are less marketable and typically held for longer period of time then shareholders will be more inclined to monitor managers and would be more concerned about firms long term profitability hence discourage managers from using income increasing income decreasing discretionary accruals. But when shareholding are held for a short term or have low shareholding, institutions will be less concerned about the long term performance hence less incentive for them to monitor managerial decisions. They will be more focused on the short term profitability hence they may actually influence managers to use income increasing discretionary accruals. This is based on the belief that before profits are reversed, institutions will sell their shareholding hence benefiting from short term …show more content…
Manager use discretionary accruals to increase or decrease profits accordingly.
Regression model is used to test the hypotheses that institutional investor discourage manager to use income increasing or income-decreasing discretionary accruals and will force changes if there is evidence of opportunistic earnings management. The sample is drawn from all companies included in the 1998 Compustat PC-Plus Active and research files during 9-year period from 1988 to 1996.The selection process yields a sample of 12,478 firm/year observations for the year 9-year period from 1988 to 1996.
The results from regression analysis support the stated hypotheses that large institutional shareholders put pressure to discourage managers to use income-increasing discretionary accruals when they have an incentive to boast reported profits where current profits are poor thus they borrow from future profits. Similarly institutional shareholders deter manager to use income-decreasing discretionary accruals where current profit are good but future performance is bleak hence they delay profits; such opportunistic actions are controlled under large institutional shareholder