The effect of institutional ownership on the informativeness of discretionary accruals

Abstract

We examine whether the pricing of discretionary accruals is associated with the level of institutional ownership. We posit that if institutional investors monitor their investment actively, then managers would be discouraged from using the discretion in U.S. GAAP to manage earnings and would be encouraged to convey private information which would translate into greater information content. As a sensitivity test, we also examine the relation between discretionary earnings and future earnings. We find that this association is positively related to the level of institutional ownership. Our results collectively support the notion that institutional investors actively monitor their investments and encourage managers to report informative accruals.