Investors Presence in Board on Managerial Discretionary Motives to Manage Earnings

The main purpose of this research is investigation the impact of institutional investors on the managerial discretionary motives for earnings management in order to assess the role of efficient monitoring hypothesis and strategic alignment hypothesis. The model which proposed by Kothari et al (2005) is used to measure the discretionary motives of earnings management based on rolling regression for each firm-year observation in related industry. Institutional ownership is categorized in two groups that consist of actual and fitted values; fitted value of institutional investors is measured using the model that suggested by Lo et al (2017). Hypotheses were analyzed using multivariate regression models based on panel data with fixed effect and generalized least squares method. Research population consists of 201 companies listed in Tehran Securities and Exchange over the period 2013-2017. Findings showed that actual institutional investors had significant and positive impact on discretionary motives of earnings management; but fitted values of institutional investors had no impact on discretionary motives of earnings management. Also, findings showed that actual and fitted values of active institutional investors had no impact on discretionary motives of earnings management significantly. The research evidences about the significant impact of actual institutional investors on discretionary motives of earnings management is consistent with strategic alignment hypothesis; upon to this hypothesis, there is strategic alignment between large institutional investors and managers. In this situation, institutional investors cause to increase the earnings management. While, the research evidences about the insignificant impact of active institutional investors on discretionary motives of earnings management is not consistent with efficient monitoring hypothesis and strategic alignment hypothesis.