Investment institutions with substantial shareholdings in a firm have the resources and incentives to monitor and influence management decisions. Whether the institutions actually monitor and exert pressure on managers is an empirical question.This study is designed to provide insights into the monitoring role of institutional investors by examining whether institutional ownership affects the informativeness of reported earnings. In this study, different hypothesis (active Monitoring Hypothesis & private benefits Hypothesis) in relation to institutional investors, are tested. two multifold linear regressions analysis is used to test the relation between corporate Earnings informativeness and institutional ownership.
The results demonstrate significant evidence of a positive association between percent of institutional stock ownership and Earnings informativeness and approve Effective Monitoring Hypothesis. In addition, the number of institutional ownership dose not improve Earnings informativeness and decreases it.