Three essays in accounting

Abstract

In chapter one, I examine the effect of passive institutional holdings on firms’ earnings quality by exploiting the variation in passive ownership around Russell 1000/2000 index cutoff. Using four sets of earnings quality proxies (properties of earnings, investor responsiveness to earnings, external indicators of earnings misstatements, and real earnings management), I find that passive ownership improves earnings quality. Furthermore, this effect is more pronounced in firms with lower active institutional ownership. Finally, I find firms with higher passive ownership undertake more long-term investments. My finding that higher passive ownership improves earnings quality in their portfolio companies suggests that passive investors play an important role in corporate governance.

Chapter two investigates the gender effect on asymmetric cost behavior. I find robust evidence that firms with female CEOs exhibit less cost asymmetry than firms with male CEOs. Cross-sectional tests show that this gender effect is concentrated in the economic downturn period, firms with higher business risk, and CEOs with higher personal career concerns, corroborating that females’ risk-aversion is the underlying mechanism through which female CEOs affect asymmetric cost.

In chapter three, I find that foreign institutional investors (FIIs) are negatively associated with their investee firms’ tax avoidance. I provide evidence that the effect is driven by the costs associated with institutional distance between FIIs’ home countries and host countries. Specifically, I find that the negative effect is driven by the influence of FIIs from countries with high-quality formal institutions (i.e., high-shareholder-protection, high-government-effectiveness, and high-regulatory-quality) / high-quality informal institutions (i.e., high-tax-morality, low-corruption, and high-religiosity) on investee firms located in countries with low-quality formal institutions/low-quality informal institutions. Finally, I show that the effect is also concentrated on FIIs with stronger monitoring incentives.

This dissertation consists of three distinct but related essays examining how diversity of investors (e.g., passive investors and foreign institutional investors) and managers (e.g., CEOs) affects firms’ accounting decision-making.