Institutional Ownership and Earning Management by Bank Holding Companies

We explore the role of institutional investors as a source of market discipline in mitigating earning management (EMGT) by bank holding companies (BHCs). We propose that ownership by monitoring institutions (institutional investors with large and long-term stakes and independence from managers) is associated with less EMGT because they have greater incentives/skills for monitoring their investees than other shareholders. We find that EMGT by BHCs is negatively associated with ownership by monitoring institutions for larger and riskier banks and for the post-SunTrust decision period. Nonmonitoring institutional ownership is unassociated or in some cases weakly or even positively associated with EMGT. Our findings suggest that regulators should facilitate ownership by monitoring institutions as a complement to regulation.