Overlapping institutional ownership along the supply chain and earnings management of supplier firms

Lei Gao*, Jianlei Han, Jeong-Bon Kim, Zheyao Pan

*Corresponding author for this work

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

7 Citations (Scopus)

Abstract

We explore the impact of overlapping institutional ownership (OIO) within supply chains on the earnings management practices of supplier firms. Utilizing a dataset of U.S. publicly traded supplier firms from 1988 to 2016, we discover that suppliers with institutional ownership overlapping with their major customers exhibit reduced levels of discretionary accruals. This finding implies that such overlap discourages suppliers from engaging in upward earnings management through the manipulation of discretionary accruals. We also find that OIO curtails accrual-based earnings management by enhancing the relationship between supply chain partners and bolstering external monitoring. Additionally, we find that OIO also mitigates the extent of real earnings management undertaken by the supplier firm. These findings remain robust after addressing potential endogeneity concerns. Our results underscore the significant role of OIO within supply chains in curbing both accrual-based and real earnings management by supplier firms. © 2023 Elsevier B.V.
Original languageEnglish
Article number102520
JournalJournal of Corporate Finance
Volume84
Online published23 Nov 2023
DOIs
Publication statusPublished - Feb 2024
Externally publishedYes

Research Keywords

  • Earnings management
  • Institutional investors
  • Overlapping institutional ownership
  • Supply chain

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