Abstract
This study investigates the relationship between patterns of stock ownership and the quality of a firm's financial reporting, as measured by earnings quality and the level of disclosure. I find that managerial stock ownership is negatively associated with earnings quality and the level of disclosure while a positive relationship is observed for institutional stock holdings. My findings are consistent with large outside investors demanding better information to alleviate agency problems and with managers internalizing the proprietary costs of disclosure as their stock holdings grow in size. These findings shed new light on conflicting results documented in prior research by highlighting the role that competing tensions (monitoring effect vs. information effect) play in determining the quality of financial reporting.
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