Institutional Investors and Bank Governance : Evidence from Earnings Management

Despite the growing importance of institutional investors in global capital markets and the link between bank earnings management and financial crash risk, little is known about institutional investors' role in mitigating bank earnings management. We conduct the first international analysis of this issue using a broad sample of banks and institutional investors. We find that institutional ownership is more negatively related to earnings management in countries with more-stringent bank disclosure requirements or when ownership is held by domestic rather than foreign institutional investors. Institutional ownership is also more negatively related to earnings management in countries with weaker investor protection or when ownership is held by institutional blockholders. Our results have important implications for policies regarding institutional investors' ownership engagement with banks