The power of oversight: Institutional investors as moderators of the earnings quality- information asymmetry nexus in Europe

Eliwa, Yasser; Haslam, Jim; Abraham, Santhosh; Saleh, Ahmed

Abstract

Purpose – While there is some evidence of a relationship between earnings quality and information asymmetry, there is limited evidence on the moderating role of institutional investors in this relationship. To fill this gap, this study aims to examine how institutional ownership affects the relationship between earnings quality and information asymmetry, with a focus on the impact of different investment horizons.

Design/methodology/approach – This study employs a sample of listed European firms from 2000 to 2022. Earnings quality is measured using the McNichols (2002) modification of the Dechow and Dichev (2002) model. The analysis examines the moderating effect of institutional ownership on the relationship between earnings quality and information asymmetry.

Findings – We find that the relationship between earnings quality and information asymmetry is more pronounced in firms with a higher percentage of institutional ownership. We find that the monitoring role of long-term institutional investors is more effective than that of short-term institutional investors. The study also finds that the influence of institutional investors is more significant in firms with incentives to engage in earnings management.

Practical implications – Our findings provide evidence suggesting that institutional investors are an important class of investors in terms of exercising an effective monitoring role to mitigate information asymmetry and demand higher earnings quality from their investee firms. These findings are informative for many financial reporting participants, including investors, analysts, regulators, and managers.

Originality/value – Our study extends the existing research examining the relationship between earnings quality and information asymmetry (e.g., Affleck‐Graves et al., 2002; Ascioglu et al., 2012; Bhattacharya et al., 2013; Jayaraman, 2008; Liu and Elayan, 2015) by examining the moderating effect of institutional ownership on this relationship. It further contributes to the literature by distinguishing between long-term and short-term institutional investors and their respective monitoring roles. Additionally, the study broadens the geographical scope of the research by using cross-country data from European firms, providing evidence that country-specific factors do not uniformly affect the relationship between earnings quality and information asymmetry.

Citation

Eliwa, Y., Haslam, J., Abraham, S., & Saleh, A. (online). The power of oversight: Institutional investors as moderators of the earnings quality- information asymmetry nexus in Europe. International Journal of Accounting and Information Management, https://doi.org/10.1108/IJAIM-01-2024-0029

• Journal Article Type: Article
• Acceptance Date: Oct 14, 2024
• Online Publication Date: Nov 6, 2024
• Deposit Date: Oct 16, 2024
• Publicly Available Date: Nov 8, 2024
• Journal: International Journal of Accounting and Information Management
• Print ISSN: 1834-7649
• Electronic ISSN: 1758-9037
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1108/IJAIM-01-2024-0029
• Keywords: Earnings quality; information asymmetry; institutional investors; investment horizon, Europe 2
• Public URL: https://durham-repository.worktribe.com/output/2959862