Purpose of this paper: This paper examines the differential effects of institutional non-blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretionary accruals. 

Design/methodology/approach:  We also propose that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (i.e. the gap between target earnings and pre-managed earnings).  In particular, we believe that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of earnings pressures is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of earnings pressure is there.  We group our sample into three earnings pressure conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings.  Consistent with our expectations, we find that NONB stimulates earnings management, but only when earnings pressure is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings. 

Findings: We also predict that ACTB will need to exercise their monitoring power only when earnings pressure is strong.  Our results confirm this prediction, but only when there is strong pressure to increase earnings.  When there is strong pressure to decrease earnings, we find inconclusive evidence regarding the effect of ACTB.  This may imply that active institutional blockholders are conservative since they appear to be more likely to limit income-increasing accruals than they are to limit income-decreasing accruals.