سرمایه گذاران نهادی، فعالیت سهامداران و مدیریت سود

The widespread practice of earnings management adversely impacts the quality of financial reports and increases information asymmetries between owners and managers. The present study investigates the effect of shareholder activism (as expressed by the proxy proposals sponsored by shareholders), and monitoring by the largest institutional owner on earnings management. Our longitudinal analyses indicate that the number of shareholder proposals received by firms is positively related to subsequent earnings management, yet concurrently, monitoring by the largest institutional owners is negatively related to earnings management. Our findings shed light on the equivocal results reported by prior research regarding the impact of shareholder activism on firm performance, on one hand, and ownership monitoring and performance, on the other.

The manipulation of the firms' earnings reported in the financial statements, also known as earnings management, is common among public companies (Pfarrer et al., 2008). Healy and Wahlen (1999: 368) note that: “Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers”. Therefore earnings management could be used to obscure the actual performance of the firm from shareholders and others, as reported numbers are not necessarily reflective of the underlying financial fundamentals of the firm ( Klein, 2002). One of the main goals of the Sarbanes–Oxley Act of 2002 (SOX) was to limit earnings manipulations ( Securities and Exchange Commission, 2003), in particular as earnings management could exacerbate informational asymmetries between shareholders and management and mislead the market participants regarding the firm's financial situation ( Chih et al., 2007). A report by the U.S. General Accounting Office (GAO) indicates that during the period 1997–2002 almost 10% of all public companies restated their financial statements due to accounting irregularities, with an accompanying $100 billion wipeout of market value ( Harris & Bromiley, 2007). The prevalence of restatements of financial reports raises the question whether such restatements are not just the tip of the iceberg, with many more firms engaging in the legal, yet questionable, practice of earnings management ( Dechow et al., 1995 and Healy and Wahlen, 1999). Furthermore, prior research has found that earnings management is associated with increased costs of capital ( Botosan, 1997 and Lang and Lundholm, 1996), and declines in stock prices ( Dechow et al., 1996). While prior research has hypothesized and investigated the impact of shareholder activism on firm performance on one hand, and ownership monitoring and organizational performance, on the other, the impact of shareholder activism and monitoring on earnings management has not been explored. Yet a meta-analysis of ownership literature (Dalton, et al. 2003) reviews 229 empirical studies, the majority of which investigate the effect of ownership on accounting performance, or a derivative of accounting performance thereof. Since managers could misrepresent accounting numbers through earnings management, it is paramount to investigate the impact of ownership monitoring and activism on earnings management. Furthermore, while prior research has explored the benefits of principal monitoring, it has not considered the potentially negative side effects, specifically that managers could respond to shareholder activism and increased public scrutiny by increasing earnings management, in order to signal managerial capabilities and adequate firm performance. Building on Schnatterly et al. (2008) findings that only the largest institutional owner has informational advantages, we explore the impact of such owners on earnings management and in particular their abilities to constrain such impression management practices. Thus, our main research question is: How do shareholder proposals and monitoring by the largest institutional investor affect earnings management? Our contribution to the extant literature is twofold. Despite Westphal and Zajac's (1994) findings that significant numbers of organizations use decoupling of symbolic versus substantive actions as an impression management technique, most of the research on shareholder involvement does not consider the implications that firms could respond symbolically to environmental pressures and shareholder demands (see Appendix A and Appendix B). While prior research has focused on how shareholder monitoring and activism impacts firm performance, this relationship may be blurred if managers respond to increased shareholder pressures by managing earnings rather than substantively improving firm performance. Furthermore, while the largest institutional owners may be well positioned to constrain earnings management, executives of firms receiving a number of different demands by active shareholders may be more tempted to put their best foot forward by managing the accounting numbers. We propose that both the saliency and the variety of shareholder demands will influence how executives respond to such challenges. Second, by investigating the impact of shareholder involvement on earnings management, we shed light on the prior research's equivocal findings regarding shareholder activism's impact on firm performance (e.g. Gillan and Starks, 2007 and Hoffmann et al., 2010; Karpoff, 2001), and ownership and performance respectively (e.g. Dalton et al., 2003). While many studies use accounting measures of performance, prior research implicitly assumes that the reported financial numbers are informative about the underlying financial situation of the firm, or that any distortions apply uniformly across all sampled firms, which may not be the case.

This study explored the impact of shareholder proposals and monitoring by the largest institutional investor on earnings management. Due to the public threat to executives' legitimacy and reputation that shareholder proposals pose, and the challenges that the variety and low saliency of shareholder demands present to executives, we have argued that managers will face incentives to signal their managerial capabilities and thus, may be more likely to engage in financial “window dressing”. On the other hand, the largest institutional owners are better positioned to constrain the practice of earnings management by their ability to gauge firm performance against the long-term fundamentals of the firm. Consistently, we find that shareholder proposals are positively related to earnings management, while the largest institutional owner stake is negatively related to earnings management. While we found that different forms of shareholder involvement may result in different and even opposing outcomes, our findings have broader implications for impression management, and indicate that future research on corporate governance and shareholder influence should consider both the symbolic and substantive actions that companies could undertake. In contrast to the constraining impact of large owner monitoring on earnings management, we found that shareholder activism, as evidenced by shareholder proposals, can increase the firms' motivation to aggressively manage their image through earnings management. Public shareholder activism poses reputation threats to the management of the targeted firm, who in turn could attempt to restore their credibility, and highlight managerial talent by putting their best foot forward and ‘beautifying’ financial performance (i.e., David et al., 2007). When the firms' legitimacy is questioned, CEOs face incentives to employ ceremonial assessment criteria (Fuller and Jensen, 2005 and Stewart, 2005). For example, firms have been shown to decouple actually from stated policies and strategies (Westphal & Zajac, 2001). This action results in generating the required impression that seems to comply with stakeholders expectations but does not do so in substance (David et al., 2007), as is the case with earnings management.