The Effect of Institutional Investors on Financial Reporting Comparability in the U.S.: Evidence from Common Institutional Blockholders

Abstract

We examine the role of institutional investors, in particular common institutional blockholders, in facilitating the financial reporting comparability of U.S. firms. We define common ownership as a situation where a given institutional investor holds at least 5% of shares in at least two firms in the same industry. We find that common ownership increases the comparability of a firm’s financial statements to those of its industry peers. The effect is stronger when common institutional blockholders invest in a higher number of firms in a given industry, when they hold a longer investment horizon/a larger stake in a firm, and when they rely more on public information. Next, we show that the effect of common ownership on the firm’s reporting comparability takes place through the hiring of industry auditor specialists and discretionary accounting choices (e.g., goodwill impairment, other asset write-downs, and non-recurring items). Finally, common ownership leads to an increased use of accounting-based relative performance evaluation in executive compensation, supporting the argument that common institutional blockholders help improve financial reporting comparability, which allows more efficient monitoring of managers.