Abstract

This study examines how firms' tendency to manipulate accruals to meet quarterly earnings targets, as measured by abnormal accruals volatility, relates to transient and non-transient institutional shareholdings. Abnormal accruals volatility is found to increase with transient (short-term) institutional shareholdings, but decrease with non-transient (long-term) institutional shareholdings. Robust across Jones-type models commonly used to estimate abnormal accruals, this result can be interpreted as suggesting that relative to individual investors' shareholdings, transient (non-transient) institutional shareholdings put more (less) pressure on firms to manipulate accruals. The difference in pressure applied is understandable given the difference in investment horizons and trading strategies across institutions; while transient institutions have short investment horizons and trade on short-term earnings news, non-transient institutions have long investment horizons and are insensitive to short term earnings news. The study also finds that estimated abnormal accruals volatility increases with analyst following, research and development expenditures, and the value-relevance of earnings, but decreases with firm size and the long-term growth rate of earnings.

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