Impact of Foreign Institutional Investors on Earnings Management: Comparison with Domestic Institutional Investors

This paper examines whether earnings management practices are differently influenced by domestic and foreign institutional investors. Discretionary accruals are used as proxies for earnings management. Using a sample of 3,290 firm-years during the period of 1995 to 2003, evidence indicates that discretionary accruals are positively(negatively) associated with domestic(foreign) institutional ownership. This result suggests that 1) firms dominated by the majority of domestic institutional investors tend to increase current earnings and 2) firms with higher foreign institutional ownership have a lower discretionary earnings management.