Institutional Ownership and Accounting Transparency

Abstract

This study proposes and tests a series of related hypotheses concerning the impacts of institutions' monitoring on managers' investing�` financing�` operating activities as well as and reporting the outcomes of such activities. In developing and testing the hypotheses, the study theoretically characterizes the term accounting transparency and provides a methodological framework within which the effects institutions' monitoring has on firms' transparencies can be inferred from market prices. The results indicate that firms with higher level of institutional ownership exhibit higher transparencies, larger idiosyncratic risks, and larger earnings response coef- ficients. These results imply that institutional monitoring curbs managers' opportunistic behaviors associated with investing�` financing�` operating activities as well as account- ing/reporting activities. The results also imply that the so-called transient view of the role of institutional investors does not hold. Additionally, the study obtained the comparable results as to the monitoring by interna- tional investors. Results indicate that international investors also monitor managers' ac- tions but the strength of the monitoring is weaker than that by (domestic) institutional investors. 1)

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