On the Association between Strategic Institutional Ownership and Earnings Quality: Does Investor Protection Strength Matter?

Abstract

The aim of this study is to examine: (i) whether strategic institutional ownership is associated with better earnings quality at the international level, and (ii) whether this relationship varies with the strength of investor protection. Using firm level data from 41 different countries, we document a positive association between strategic institutional ownership and firm earnings quality. More importantly, we find that the documented association is economically more significant in countries with stronger investor protection. Our results are robust to a battery of robustness tests. We interpret our findings as evidence that the monitoring role played by institutional investors is shaped by the degree of investor protection at the country level.