5. Conclusions
Using a broad dataset drawn from 41 countries, we investigate the role institutional ownership and product market competition play in curbing earnings management (both accrual and real). Overall all, we document an asymmetry in the role institutional ownership and product market competition play in curbing accrual vis-à-vis real earnings management.
We find no statistically significant association between real earnings management and percentage of institutional ownership. In sync with predictions that institutional investors tend to focus on short-term profit goals, and thus, pressure managers to engage in earnings management, we find a positive significant association between accrual earnings management and percentage of institutional ownership; firms with higher percentage of institutional ownership use the financial reporting system (i.e., accrual earnings management) to obfuscate economic performance.
We also find that product market competition is significantly positively associated with accrual earnings management, when we proxy industry competition by HHI. Though positive, the association between accrual earnings management and product market competition is not statistically significant for the other two proxies of product market competition - INDUSTRY LI and NUMB. These results are consistent with the view that firms in industries with higher competition opt for more earnings management to avoid the revelation of strategic information to competitors. Alternatively, it's consistent with the view that managers of companies in highly competitive industries, threatened by heightened career concerns and facing a constant pressure to match or beat the earnings performance of their industry peers appear to engage in higher levels of accrual earnings management.
