This study examines whether the level of institutional ownership is correlated with managerial discretionary accounting choices in the UK. Prior studies examined the institutional ownership as a stand-alone factor for earnings management. This study examines how the managerial acrobatics over the reported results vary according to the different levels of institutional ownership. The purpose of this study is to shed light on the association of institutional ownership and earnings management, not only from discretionary accruals perspective but as well from real activities perspective. It is crucial to understand the underlying factors that enhance or undermine the transparency of reported earnings and more specifically how the ownership structure exerts positive or negative influence on the credibility of financial results. Analysts, investors, auditors, public policers and managers should be interested in this kind of analysis because it provides insight how the level of institutional ownership can be a determinant factor of earnings quality in the UK. Our findings suggest that the different levels of institutional investors’ participation correspond to different levels of earnings management exerting a quadratic influence.
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