Large Shareholders and Accounting Choices

This is the first large-scale study to examine the effects of individual large shareholders, defined as blockholders who hold five percent or more of the company's stock, on firms' accounting choices. Using a large hand-collected sample of all blockholders of S&P 1500 firms for the years 2002 - 2009 (23,555 blockholder-firm-year observations; 8,409 firm-years; 574 uniquely identified blockholders), we document significant variation among blockholders and significant heterogeneous blockholder fixed effects on financial reporting quality (accrual-based earnings management, real earnings management, and restatements). We find evidence suggesting that this association is primarily driven by large shareholders influencing rather than "selecting firms' accounting practices. Using very detailed data on each blockholder, we find only limited evidence that observable factors explain the fixed effects results we observe, suggesting the presence of important unobservable heterogeneity among large shareholders. Finally, we identify "reputable blockholders as blockholders associated with high financial reporting quality, and find that the presence of reputable blockholders is positively related to future earnings persistence.