Institutional ownership, earnings management and earnings surprises: evidence from 39 years of U.S. data


  • Justin G. Davis Department of Business Administration, Washington and Lee University, Lexington, Virginia, USA
  • Miguel Garcıa-Cestona Department of Business, Universitat Autonoma de Barcelona, Barcelona, Spain


Financial reporting quality, Institutional investor ownership, Earnings management, Earnings surprises, Corporate governance, Nonlinearity



As the influence of institutional investors over managerial decision-making grows, so does the importance of understanding the effect of institutional investor ownership (IO) on firm outcomes. The authors take a comprehensive approach to studying the effect of IO on earnings management (EM).


The authors study the relation between IO and EM using a sample of 59,503 listed U.S. firm-year observations from 1981–2019. The authors proxy EM with earnings surprises and with accrual-based and real activity measures. The authors test for nonlinear relations and analyze changes resulting from the passage of the Sarbanes–Oxley Act.


The findings support a positive IO-EM relation overall, but show that the relation is dynamic and heavily context-dependent with evidence of nonlinearity. The authors also find evidence that IO positively affects accrual-based EM and real activities EM negatively.


To the authors’ knowledge, this is the first study of the IO-EM relation to consider evidence of nonlinearity in the U.S. context, measuring changes to the relation over time, and with the use of several measures of EM.



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How to Cite

Davis, J. G. ., & Garcıa-Cestona, M. (2023). Institutional ownership, earnings management and earnings surprises: evidence from 39 years of U.S. data. Journal of Economics, Finance and Administrative Science, 28(56), 218–236. Retrieved from