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In this paper, we study the impact that financial institutions have on a firm’s earnings management, when acting as lenders or owners. Making use of a database of 2844 non-financial Spanish firms for the period 1996-2000, we find that when financial institutions are shareholders, they stimulate earnings management practices in participated firms, especially when these institutions are not lenders. Additionally, when we distinguish between banks and S&L institutions, we find that only the latter institutions stimulate earnings manipulation in participated firms. Finally, we find that any increase in the number of financial institutions as owners hinders earnings manipulation. Hence, a reduction in earnings management, for those firms where by financial institutions have holdings, can be achieved by increasing the number of this type of shareholder, as well as by stimulating their creditor role.
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