Iskandar REBAI (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT

Vol No. 1, Issue No. 1, 025 - 032

INSTITUTIONAL OWNERSHIP
HETEROGENEITY AND ACCRUALS
MANAGEMENT: A PANEL DATA
ESTIMATION
Iskandar REBAI
Faculty of Economic Sciences and management Sfax, Tunisia

E-mail: r_iskandar2002@yahoo.fr

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EB
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 Iskandar REBAI (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT
Abstract
This study has examined the association between institutional
investors’ ownership and accruals management practice using
panel regressions with fixed and random effects. It has
investigated this relationship for a sample of 123 US firms. It
has examined also the effect of institutional ownership on
earnings management of firms having different information
environment (S&P 500 versus non S&P 500). Results have
shown that the involvement of investment funds and banks in
the firms’ capitals exacerbates earnings management
behaviors. Moreover, the hypothesis of the relevance of the
environment information in the explanation of the institutional
investors’ behavior has been confirmed.
Keywords: Institutional investors, discretionary accruals,
earnings management
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1. INTRODUCTION
Earnings management is a common practice in the
United States. Indeed, managers exploit the
weakness of control to alter the results of their
firms. In this context, the Sarbanes Oxley Act
(2002) is a response to scandals in many companies,
in particular, WorldCom and Enron. This act was
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passed by the Congress in July 2002 to strengthen
the fiduciary responsibility in companies and hence
restore investor confidence. In fact, penalties were
introduced for violations recorded [1]. Moreover,
the motivation to manipulate results stem from
different motivations. Particularly, the intention of
managers to maximize their compensation, to
improve their reputation and to protect themselves
against the threat of takeover [2].
However, a party appears to have a privileged
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position to effect change: institutional investors.
Institutional investors have become the largest
holders of firm's capitals over the last twenty years
and the most active players in corporate governance
[3]. According to [4], institutional investors hold
about half of the shares of American firms.
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Similarly, in 2008, The Conference Board said that
institutional participation is 66.3% of all U.S firms'
shares in 2006. Towards the end of 2007, they held
76.4% of the 1000 largest U.S companies' shares.
Nevertheless, the researches that exist on the
relationship between institutional investors and
earnings management provide diametrically
opposed results. Indeed, some authors believe that
institutional investors are more informed with
respect to individual investors. In fact, they spend
enormous resources in gathering and interpreting
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Vol No. 1, Issue No. 1, 025 - 032
information and in the realization of sophisticated
financial analysis. A process associated with the
limitation of opportunistic behavior of managers in
terms of earnings management [5], [6]....
However, others believe that the institutional
investors incite managers to manage results because
of their short-term horizon and their private
relationship with the firm [7], [8]....
Nevertheless, institutional investors have different
investment horizons and motivations [9], [10].
Therefore, their influence on the maneuvers of
leaders is different. A major contribution of this
study is that it examines how different types of
institutional investors, who have different strategies,
influence managerial' behaviors. We emphasize on
three types of institutional investors that have
different characteristics: pension funds, investment
funds and banks. In addition, we think that previous
studies neglect the role of the information
environment of firms in explaining the behavior of
institutional investors. Our study assumed an
influential role of the information environment on
the behavior of institutional investors. In fact,
companies that belong to the S & P 500 stock index
are generally of great size, use the services of highly
experienced analysts and are subject to effective
control by the different stakeholders [11].
Therefore, the behavior of institutional investors
appears to be different in these firms [12]. The
study of the information environment is an
important contribution of our research to the
existing literature. The remainder of the paper is
organized as follows. The next section gives the
materials and methods used. Section 3 presents
results and discussions.
II. MATERIALS AND METHODS
2.1. Data
The sample used in our survey is composed of data
carrying on firms of the American economy
detected from the firms’ yearly reports distributed
by the Security and Exchange Commission. From
an initial sample, we eliminated the financial firms
and insurance companies as well as firms whose
data are missing or the yearly reports are distributed
for less than four consecutive years. Our final
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 Iskandar REBAI (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT
sample is limited to 123 American firms1 for the
period from 2002 to 2005.
2.2. Variables description
2.2.1. The dependent variable
The most direct method to detect and to measure
earnings management is to use a model based on
accruals. The earnings management will be
represented therefore by the discretionary accruals
which represent the difference between the total
accruals cleared by firms and during a particular
exercise and the non discretionary accruals that
reflect the normal level of the activity of the firm.
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The total accruals (ACCT) have been calculated
using the method of cash flow, according to which
the total accruals are the difference between the net
profit (NR) and cash flows of exploitation (CFL).
ACCTt  RNt  FTEt (1)
Shang (2003) uses a model based on accruals
developed by [13] to measure the earnings
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management. [14] Adopts it to discern if the market
overestimates the persistence of accruals.
Nevertheless, authors try to use the modified Jones
model to study the effect of the earnings
management on the phenomenon of decision
making in the firm.
The total accruals calculation was about the period
going from 2003 to 2005. The total accruals are
decomposed in two parts: the discretionary accruals
(ACCD) and the non discretionary accruals
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(NDACC). Thus,
ACCDit  ACCTit  ACCNDit (2)
We used the model of [15] for the discretionary
accruals evaluation. It takes the discretionary
accruals evaluation as a basis on controlling the non
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discretionary part. The model of [15]:
ACCTit= a0 + a1 (CAit-CCit) +a2 (IMMOit) + vit
(3)
With, ACCTit, the total accruals of the equation (3)
standardized by the total asset in the beginning of
the period; CAit, business number of the year t less
the business number of the year t-1 standardized by
the total asset in the beginning of the period; CCit,
1
43 firms belonging to the S&P 500 stocks and the others
don’t belong to the S&P 500 stocks.
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Vol No. 1, Issue No. 1, 025 - 032
the net accounts receivable of the year t less net
accounts receivable of the year t-1, standardized by
the total asset in the beginning of the period;
IMMOit, immobilizations of the year t standardized
by the total asset in the beginning of the period;
it, term of mistake representing the discretionary
accruals evaluation (ACCD); i, parameters of
models to estimate.
Thus, the discretionary accruals represent terms of
mistakes that result from the equation (3)
ACCDit = ACCTit – [â0+ â1 (CAit-CCit) +â2
(IMMOit)] (4)
2.2.2. The independent variables
a) Pension funds ownership
According to [16], pension funds are encouraged to
play an active role in monitoring and
communication with the firm's leaders. Similarly,
[17] and [18] consider that the pension fund
activism is the subject of an evolution from the
model of control by the market to a political model
of control. So, we can predict a negative association
between pension funds ownership and earnings
management.
b) Investment funds ownership
Investment funds are short term oriented. Their
possession is about one year [19]. Indeed, contrary
to the pension fund managers, managers of
investment funds are subject to performance
constraints required by their superiors. As such, [9]
and [20] believe that the internal compensation
system of these investors is based on the quarterly
performance level of their holdings. Thus, fund
managers are replaced each time the result reached
by the company is inadequate. In addition, clients of
investment funds are individual investors, who are
based in their investment decisions on short-term
information collected from newspapers and
magazines [21]. Indeed, the involvement of
investment funds in the capital incites managers to
manage earnings.
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 Iskandar REBAI (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT
c) Banks ownership
[7] notes that banks don’t press leaders to manage
results since they have a long-term investment
horizon. As a result, banks inhibit earnings
management. However, as soon as the bank is
present in the firm’s capital, it has more of luck to
reach the relevant information sources regarding the
firm’s financial situation. Therefore, leaders give up
the earnings management in order to signal
capacities of their firms to banks.
2.2.3. The control variables
 Managerial ownership is defined as the
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proportion of capital held by managers. Managerial
ownership can align the interests of managers with
those of shareholders. We therefore expect a
negative relationship between managerial
ownership and earnings management.
 The debt ratio is measured as total debt
divided by total assets. In the case of a lack of
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internal financial resources, the company uses debt.
However, more the ratio of debts increases more the
possibility to manipulate results to rape contracts of
debts increases. To this consideration, [22] bring
back that firms that violate contracts of debts use
more discretionary accruals to increase results.
Thus, we can say that more the level of debts is
raised more the leader manages results through the
discretionary accruals.
 Liquidity is measured as current assets
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divided by current liabilities. [3] notes that the
variation of the liquidity degree explains the change
in the discretionary accruals level. In fact, [23] note
that more the liquidity lowers, more it is necessary
to manage results toward the rise to compensate the
lack of liquidity. Consequently, more the liquidity
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lowers more the level of earnings management by
discretionary accruals increases.
 The size is measured by the logarithm of
total assets. Leaders of the big firms are motivated
to manage their results to decrease their political
visibility. So, we predict a positive relationship
between size and earnings management.
2.2.4. Information environment hypothesis
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Vol No. 1, Issue No. 1, 025 - 032
[24] as well as [25] show that in opposition to the
individual investors, the institutional investors have
a preference for the investment in the big firms. [25]
stipulates that the positive relation between the
institutional involvement and the size of the firms
essentially drifts to the legal constraints and the
relatively important transparency level in the big
businesses. Nevertheless, these firms are submitted
to more of control on behalf of the different taking
parts and resort more than the others to financial
analyst services. In this order of idea, [3] considers
that firms that belong to the S&P 500 stocks have a
more elevated stock capitalization and a more
important transparency level in contrast with non
S&P 500 firms. The informational environment of
firms belonging to the S&P 500 stocks is supposed
more rigorous in comparison with to the one of the
other firms. We think that the influence of the
institutional investors on managerial latitude
concerning earnings management varies depending
on whether the studied firms belong or no to the
S&P 500 stocks [12].
2.3. Estimation method
We focus on panel data. The study period is from
the year 2002 to 2005. One possible estimation
methods is the method of least squares (OLS). This
estimate assumes that all parameters are identical.
The model would be consistent. However, the risk
of sample heterogeneity exists, making biased
estimates by OLS. So we adopt an estimation based
on panel fixed and random effects.
ACCD = f (INSD, DET, LIQ, LTA, PFP, PFI, PBQ,
error term)
With;
 ACCD : The magnitude of discretionary
accruals measured by the absolute value of
discretionary accruals from equation (4);
 PFP: pension funds ownership;
 PFI: investment funds ownership;
 PBQ: banks ownership;
 INSD: managerial ownership;
 DET: the total debt of total assets;
 LIQ: current assets divided by current
liabilities;
 LTA: the logarithm of total assets;
 α i, β i, δ i,: the model parameters to estimate;
 u, v, w: error terms.
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 Iskandar REBAI (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT
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III. RESULTS AND DISCUTIONS 3.1.2. Role of investment funds

3.1. The impact of different institutional
ownership on the accruals management
Assuming that the effect of independent variables
on the endogenous variable is linear and that the
available data are panel data, we can specify the
following econometric equation:
ACCDit = α0 + α1 INSDit + α2 DETit + α3 LIQit +
α4 LTAit + α5 PFPit + α6 PFIit + α7 PBQit+ + uit
(5)
Investment funds have a positive influence on the
level of earnings management. [26] suggest that
investment funds have a short term investment
horizon. Managers of investment funds sell their
detention following the decline in short-term
performance. Thus, their presence in the firm's
capital encourages managers to manage results
upward. [27] noted that following the increase in the
level of earnings management of 10%, investment
funds limit their holding in the company of only
0.7%.

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The results of equation (5) regression by the panel 3.1.3. Role of Banks
fixed effects method are presented in the following
table: The participation of banking institutions in the
capital has influenced positively the level of
Table I Regression results of equation (5) earnings management by discretionary accruals.
The dependent variable: the discretionary Banks are sensitive to leadership decisions [2]. In
accruals fact, in addition to their investment relationship
Explanatory Coefficients
EB (T-Student) with the firm, they generally establish a business
Variables relationship with the managers. They often play the
role of shareholder and creditor at a time. This
Constant 0.0027 0.56
PFP -0.000007 -0.01 dependence vis-à-vis the company, place them in a
PFI 0.0009 4.41 *** difficult position when trying to control managers.
PBQ 0.000063 2.26 *** Therefore, banks are reluctant to oppose the
INSD -0.000024 -0.96 decisions of leaders even those that are harmful to
DET -0.017 -9.16 *** the interests of shareholders. Thus, they incite
LIQ 00000009 0.18 managers to manipulate results through
LTA 0.0005 1.47
Within R 2 = 0.35 Hausman = 24.06 F = 38.41
discretionary accruals.
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Between R 2 = 0.09 Prob = 0.0011 Prob F = 0
Overall R 2 = 0.10 3.1.4. Control variables effects

 (T-Student) Our assumption that the managerial ownership

 (*) Indicate significance at the 10% limits manipulation of the results is infirmed.
 (**) Indicate significance at the 5% Indeed, the variable "INSD" doesn't influence
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 (***) indicate significance at the earnings management through discretionary

3.1.1. Role of pension funds
Pension funds ownership doesn't affect the earnings
management by discretionary accruals. We
therefore reject our hypothesis. Thus, despite their
activism and their long-term investment horizon,
pension funds can not limit the earnings
management. So, to reduce monitoring costs,
pension funds play a stowaway role.
accruals. Similarly, the liquidity and the size don't
have an influence on the earnings management.
Thus, although the weak of liquidity level and the
big size of the firm, earnings management level
doesn't change.
However, the variable "DET" has influenced
negatively the earnings management practice. So,
we infirmed our hypothesis that more the ratio of
debts increases more the possibility to manipulate
results to rape contracts of debts increases.

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 Iskandar REBAI (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT
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The dependent variable: the discretionary

3.2. The impact of the informational accruals
environment of firms on the institutional Explanatory Coefficients Z
investors' behaviors regarding earnings Variables
management Constant 0.006 2.81 ***
PFP 0.00003 0.35
3.2.1. The firms surveyed belong to the S & P 500 PFI -0.0000007 -0.31
stock index PBQ 0.00011 3.99 ***
INSD -0.00002 -0.81
ACCDit = β0 + β1 INSDit + β2 DETit + β3 ROAit DET -0.007 -3.64 ***
+ β4 LTAit + β5 PFPit + β6 PFIit + β7 PBQit + vi LIQ -0.00001 -0.16
LTA 0.0002 1.11
(6) Within R 2 = 0.14 Hausman = 10.44 F = 15.41
Between R 2 = 0.07 Prob = 0.16 Prob F = 0
The regression results of equation (6) by the method Overall R 2 = 0.08
of panel fixed effects are presented in the following

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 (Z)
table:  (*) Indicate significance at the 10%
Table II Regression results of equation (6)  (**) Indicate significance at the 5%
The dependent variable: the discretionary  (***) indicate significance at the 1%
accruals
Explanatory Coefficients (T-Student) 3.2.3. The changing of informational environment
Variables results analysis
Constant 0.012 1.37
PFP
PFI
-0.0004
0.00012
EB -1.49
3.57 ***
The estimation of equation (6), where firms
PBQ 0.00011 0.96 surveyed belong to the S & P 500 stock index, has
INSD -0.00007 -0.90 shown that investment funds have a positive
DET -0.02 -5.47 *** influence on the level of earnings management,
LIQ 0.00008 0.15 pension funds and Banks do not affect earnings
LTA -0.00008 -0.13 management through discretionary accruals.
R2Within = 0.43
However, the estimation of equation (7) for firms
R2Between = 0.05 Hausman =11.72 F = 64.24
R2 overall = 0.03 Prob = 0.11 Prob F = 0 that do not belong to the S & P 500 stock index has
shown no significant effect of pension funds and
 (T-Student) investment funds on the level of earnings
A
 (*) Indicate significance at the 10% management. Nevertheless banks exerted a positive
 (**) Indicate significance at the 5% effect. So, our hypothesis of the relevance of the
 (***) indicate significance at the 1% information environment of firms in explaining the
behavior of institutional investors is supported in
3.2.2. The firms surveyed are not belonging to the the case of investment funds and banks. The
S & P 500 stock index passivity of pension funds in the S & P 500
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companies is explained by their preference to play

ACCDit = δ0 + δ1 INSDit + δ2 DETit + δ3 LIQit +
δ4 LTAit + δ5 PFPit + δ6 PFIit + δ7 PBQit + wit
(7)
The regression results of equation (7) by the method
of panel random effects are presented in the
following table:
stowaway role. In fact, the leaders of these
companies are generally subject to an effective
control by various stakeholders. However, the
passive behavior of investment funds in companies
that do not belong to the S & P 500 seems to be
surprising since these institutions do not establish
business relationships with the managers.

Table III Regression results of equation (7) 3.3 Conclusion

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 Iskandar REBAI (IJAEBM) INTERNATIONAL JOURNAL OF ADVANCED ECONOMICS AND BUSINESS MANAGEMENT
Our research idea originates from a literature review
of previous studies. By referring to the results of
these studies, we determined our basic assumptions
that address the effect of participation of
institutional investors in the capital on earnings
management [28], [11], [6], [29]. The present work
has as objective to verify if institutional investors
are able to limit the manipulation of results by the
managers.
The econometric analysis of the relationship
between different institutional investors and the
level of earnings management, on a panel of U.S.
firms observed during the period 2003-2005, shows
distinct behavior of institutional investors towards
the manipulation of results. The influences of these
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investors vary with the type of institution studied.
The result indicates that pension fund following
passive behaviors despite their independence from
the managers. However, investment funds and
banks incite the managers to manipulate earnings
through discretionary accruals.
The empirical validations concerning information
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environment shows that, excluding pension funds,
institutions studied have distinct behaviors in both
categories of firms (S&P 500 versus non S&P 500).
These results imply that the informational
hypothesis is confirmed for the case of investment
funds and banks.
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