Study On The Strength Of The Market Reaction To Earnings Management Under The Impact Of Institutional Investors

Earnings management has always been a hot topic of concern in Chinese securitymarket. Many listed companies in China take a variety of means to manage earningsfor a variety of purposes to transfer the false accounting information about companyearnings to the outside world. The managed earnings can’t truly reflect the ifnancialposition and operating conditions, which harm the interests of investors and seriouslyinterfere with the normal operation of the capital market.Due to the professionalism of the accounting information, individual investorsfind it difficult to identify earnings management behavior from the accounting data.Compared to individual investors, institutional investors have more convenient accessto information and more abundant professional knowledge which make their discoveryand exploitation ability is far better than individual investors. Institutional investors’ability to assess the value of companies and the speed of response to financialinformation should take the lead in the market. So as an investment expert, whetherinstitutional investors can identify earnings management and put them into the marketprice mechanism to protect the innocent investors has become the focus of attention.Through the normative research, this paper analyses the motivation andmechanism of institutional investors’ discovery and dissemination of earningsmanagement behavior as well as discusses its theoretical basis and forming mechanism.And then uses the event study method in empirical research, testing the associationbetween unexpected discretionary accruals and cumulative abnormal returns over ashort window around the third quarter ifnancial report by taking multiple linearregression model. The empirical results show that under the influence of institutionalinvestors we document a negative between unexpected discretionary accruals andcumulative abnormal returns over a short window around the third quarter financialreport. It means that institutional investors can early identify earnings managementbehavior of enterprises.The innovation of this paper ifrstly lies in the perspective of research. Currentresearches in related ifelds at home and abroad mainly focused on institutionalinvestors’ watchdog role of earnings management, this paper focuses on whether theinstitutional shareholders could identify and reflect the earnings management behavior.Secondly, starting from the institutional investors’ interest pattern this paper analyses their motivation and mechanism of the discovery and dissemination of earningsmanagement. This has certain significance for expanding the study of the role playedby institutional investors in the operation of corporate governance and capital market.