This study proposes and tests a series of four related hypotheses concerning the impacts of institutions` monitoring on firms` accounting transparency. In developing and testing the hypotheses, the study theoretically characterizes the term 'accounting transparency' and provides a methodological framework within which the effects institutions` monitoring have on firms` accounting transparencies can be inferred from market prices.
Results indicate that the higher the institutional ownership, the less is the use of managerial discretions not only in firms` investing·financing·operating activities but in accounting and reporting the outcomes of such activities. Consequently, firms with higher institutional ownership exhibit higher accounting transparencies and larger earnings response coefficients. These results suggest that institutional investors do monitor not only the firms` investing·financing·operating activities but the accounting and reporting activities as well and such monitoring results in enhancing the transparencies of the firms` accounting information systems.
Additionally, we obtained the comparable results as to the monitoring by international investors. Results indicate that international investors also monitor managers` actions but the strength of the monitoring is weaker than that by (domestic) institutional investors.
Keywords: Institutional ownership; Institutional monitoring; Accounting transparency; Discretionary accrual; Earnings response coefficient.
