Is Accruals Management Constrained by Institutional Investment Size or Persistence? Indian Market Evidence

This article examines the relationship between institutional investment stability and the reliability of financial reporting. The sample consists of all publicly traded firms on the Indian market from 2013 to 2021. The size of Institutional investment and its stability are used to regress discretionary accruals. The article also investigates whether the scale of institutional investment, its long-term stability, or both contribute to effective monitoring that limits discretionary accruals. The findings indicate that the persistence of institutional investment and large-scale investment significantly restrict discretionary accruals. This indicates that large institutional investments and their stability improve the quality of financial reporting. However, the monitoring is ineffective when the size of institutional investment is small and/or the persistence of institutional investment is low. Institutional investors can effectively monitor large-scale investments and the persistence of their investments. In the context of promoters pledging shares, neither the size of institutional investment nor its persistence can reduce discretionary accruals. This indicates increased pressure on managers to adopt earnings management when promoters’ shares are pledged. The results also demonstrate that operating assets, operating cycle, and leverage provide more opportunities for earnings management. Conversely, firm size is negatively associated with discretionary accruals. This article is the first to examine the impact of institutional investment stability on accrual management. It offers valuable insights into evaluating corporate reporting quality dynamics, considering the evolving role of institutional investors in the corporate governance of their investee firms.