Abstract
This study investigates whether monitoring by institutional investors mitigates or facilitates earnings management around seasoned equity offerings (SEOs). We also explore how the capital market reacts to the (monitoring/self-serving) effect of institutional investors on earnings management. Results suggest that active, rather than inactive, institutions effectively reduce real earnings manipulation around SEOs. However, when SEO firms with high active institutional ownership engage in real earnings management, the capital market adversely reacts to this monitoring malfunction. Results remain robust after considering endogeneity, corporate governance, and financial crises.
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