The role of institutional shareholders in the relationship between unconditional conservatism and earnings management

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Abstract

This study investigates whether and how institutional shareholders affect the relation between unconditional conservatism and earnings management. We analyze the relation between unconditional conservatism and accrual-based earnings management and the relation between unconditional conservatism and real earnings management, focusing on the role of the institutional shareholders variable in these two relations. First, we find evidence of positive (negative) relations between unconditional conservatism and accrual-based (real) earnings management. Second, we demonstrate that the presence of institutional shareholders has a mitigating (amplifying) impact on the relation between unconditional conservatism and accrual-based (real) earnings management. This study contributes to enrich the previous literature in two ways. First, it extends the strand of research on the relation between accounting conservatism and earnings management (Garcìa Lara, García Osma, & Penalva, 2020; Chen, Hemmer, & Zhang, 2007; Gao, 2013), focusing on unconditional conservatism since it is less prevalent than conditional conservatism in previous literature (Ruch & Taylor, 2015). Second, it extends the strand of research on the impact of institutional ownership on accounting practices (Farooq & El Jai, 2012; Sakaki, Jackson, & Jory, 2017), highlighting the role of the institutional shareholders in the relation between unconditional conservatism and earnings management.

Keywords: Institutional Shareholders, Unconditional Conservatism, Accrual-Based Earnings Management, Real Earnings Management

Authors’ individual contribution: Conceptualization — M.M.; Methodology — R.C. and F.M.; Writing — Original Draft — R.C. and F.M.; Writing — Review & Editing — R.C. and F.M.; Supervision — M.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, M10, M41

Received: 14.08.2021
Accepted: 11.10.2021
Published online: 12.10.2021

How to cite this paper: Casciello, R., Maffei, M., & Meucci, F. (2021). The role of institutional shareholders in the relationship between unconditional conservatism and earnings management. Corporate Ownership & Control, 19(1), 94–104. https://doi.org/10.22495/cocv19i1art8