Accruals management and institutional trading

Abstract

Earnings management has long been an important issue in both academic research and regulatory debates. In this study, I provide empirical evidence that institutional investors understand and trade on accruals information. Specifically, in a sample with ex post evidence of accruals management, I find a significantly negative association between discretionary accruals and quarterly changes in institutional ownership, and this negative association exists even after the Regulation Fair Disclosure (Reg FD) became effective in October 2000. I also show that institutional trading on accruals mitigates the accruals anomaly. This study contributes to understanding market efficiency and has implications for accounting standard-setting.