The Impact of Institutional Owners on Earnings Management : Evidence from Sweden

Sammanfattning

Background: The complex landscape of institutional ownership and its relationship with EM remain as a subject of mixed empirical findings. A theoretical tension arises when researching previous literature of the subject, where some argue that they are excellent monitors, and some argue that the monitoring incentives are highly dependent on the specific identity of the owner. Further, there is a key distinction within the category of institutional ownership, with pressure- sensitive and pressure-resistant institutional owners. This study examines both aggregated institutional owners and pressure-sensitive owners within a Swedish context, where the Swedish Corporate Governance Code mandates active stewardship and theoretically could change these dynamics. Purpose: This thesis examines institutional owners and pressure-sensitive owners and their relationship with Earnings Management among Swedish listed firms, with the scope of identify and clarify which theoretical forces mandates in the Swedish context. Method: Using panel data from 224 listed firms on the Swedish stock exchange in the period 2020-2024. By using the Modified Jones model, we proxied Earnings Management as absolute discretionary accruals. Two linear regression models were applied, with institutional ownership as the independent variable in the first model, and pressure-sensitive ownership in the second model. The models utilized firm-level control variables and year and industry dummies. Conclusion: The results do not support the first hypothesis of the study. Aggregate institutional ownership does not show any significant relationship with EM. This finding is attributed to the i heterogeneity and aggregation bias that occurs when treating IOs as one heterogeneous group. However, the second hypothesis is supported by the findings. PSIOs do have a significantly negative relationship with EM, which contradicts previous studies of PSIOs and the conflict- of-interest hypothesis that is assumed to exist in the dual relationship that they possess. This finding is explained by the Swedish Corporate Governance Code, and institutional pressures that are embedded in the Swedish market.