The governance effect of institutional stakeholders on family-controlled companies’ earnings management

Abstract

The characteristics of institutional investors are that they hold massive funds and possess investment expertise; therefore, these investors are expected to have an influence on corporate governance. This study explores the supervising effect of active and passive institutional investors on company’s earnings management in Taiwan, and whether the supervising effect differs between family and non-family-controlled companies or not. The empirical results show that institutional investors are significantly related to earnings management in both family and non-family-controlled companies. Moreover, active investors have more impact on earnings management than passive ones in family-controlled companies. Institutional investors, especially active investors, have been shown to have significant governance effect; therefore, companies are encouraged to attract institutional investors to enhance corporate governance.