AAA Spark Meeting of Regions

Financial Misconduct Spillover: Institutional Investors with Disciplinary History and Aggressive Financial Reporting

• In Event: CSR: Institutional Monitoring and Earnings Quality

Abstract

This study examines the role of financial misconduct of institutional investors on the aggressive financial reporting practices of investee firms. We find that firms held by institutional investors with disciplinary history (IDH) are more likely to engage in aggressive financial reporting practices. Our results support the non-monitoring channel: the lack of monitoring by IDH creates the right environment for firms to engage in aggressive financial reporting. Moreover, we find evidence that activist institutions attenuates the effect of IDH on aggressive financial reporting behavior of investee firms. Lastly, we determine that both IDH and management of investee firms benefits from aggressive financial reporting behavior. The results continue to hold after implementing various statistical tests to address potential endogeneity issues and alternative measures for aggressive financial reporting practices.

Authors

• Avishek Bhandari, University of Wisconsin Whitewater

• Babak Mammadov, Clemson University

• Blerina Zykaj, Clemson University