Institutional Monitoring and Earnings Quality in Malaysia

This study examines the relationship between institutional ownership in Malaysia and the quality of reported earnings. Given the typically significant stake and unique position of influence, participation from active institutional investors is said to provide an effective monitoring role in the companies in which they invested. Using the accrual quality model to measure earnings quality, this study provides evidence that concentrated shareholdings, in the hands of institutional investors, afford greater incentives to closely monitor firms’ activities. The results confirm the active monitoring hypothesis, which suggests that institutional investors are likely to actively monitor their investments due to the large amount of wealth they invested. Furthermore, the government's commitment to the establishment of the Minority Shareholder Watchdog Group (MSWG) to encourage shareholder activism appears to have a positive effect on the financial reporting quality in Malaysia.