THE EFFECT OF INSTITUTIONAL OWNERSHIP ON THE QUALITY OF EARNINGS (CAPITAL MARKETS)

The presence of institutional investors is increasing rapidly in the U.S. capital markets. A number of recent studies have examined the role of institutional investors in the capital markets, in particular, studies have examined whether institutions monitor management. Although the results have been mixed, this research provides support for the proposition that institutional investors monitor management and affect corporate performance. This study is designed to provide additional insights into the monitoring role of institutional investors by examining whether institutional ownership also enhances the reporting of corporate performance (i.e., quality of earnings).; A second objective of this study is the development of a more comprehensive way of measuring earnings quality. Quality relates to the usefulness of earnings information to the users of such information. Currently, no uniform method is used to measure earnings quality. Typically, researchers use one or more independent proxies to assess earnings quality. Such an approach may fail to capture its multiple dimensions and potentially lead to erroneous conclusions about earnings quality. This dissertation uses the Financial Accounting Standards Board's (FASB) conceptual framework to guide the measurement of earnings quality. The FASB, in Statement of Financial Accounting Concepts (SFAC) No. 2 “Qualitative Characteristics of Accounting Information,” describes six primary attributes which accounting information should possess in order to be useful to decision-makers. This study uses proxies for these attributes to assess the quality of earnings.