Institutional investor monitoring and earnings management: A network approach

Analyzing a large sample of U.S. firms over the 1990–2019 period, we show that firms with more central institutional investors in the equity holdings network engage less in accrual-based earnings management. This finding is robust to controlling for clique and common ownership, using alternative network and earnings properties, and extends to real earnings management. We establish causality using exogenous variation in network centrality and investor attention. The effect is most pronounced for institutions with a comparative advantage in exploiting monitoring information. Overall, our results suggest that central institutional investors gain an information advantage through access to the network’s resources, increasing their monitoring ability.