Institutional Investor’s Shareholding, The Auditor Choice And Earnings Management

With holding more and more company’s stock and having dual agencyrelationship, institutional investors have the ability and motivati on to reduce thecompany’s earnings management in order to obtain a more realistic and accuratefinancial information to make the right investment decisions. As we know, thehigh-quality financial information is closely related to the high-quality audit, for thehigh-quality auditor can better suppress companies’ earnings management behavior.So, as shareholders of the company, institutional investors will ask to choosehigh-quality auditors to audit the companies so as to reduce the company’s earningsmanagement becomes a problem worthy of study.Firstly, based on agency theory, asymmetric information theory, shareholderactivism theory and signaling theory, we analyzed how institutional investors impacton auditor choice, impact on earnings management and the mediating effect of auditorchoice as a signal transmission mechanism. And on this basis, we put forward thehypothesis. Then we selected data2010-2012Shanghai and Shenzhen Stock ExchangeA share listed companies as samples, built related models, and through descriptivestatistics, correlation analysis, regression analysis and testing of the mediating effect,we used empirical analysis to research the hypothesis. Finally, based on empiricalanalysis and conclusions, we put forward some policy recommendations.The research found that: Firstly, institutional investors can influence the auditorchoice which is the external governance mechanisms of the company. That is to saythe institutional investors holding more company’s stock, the company will moreinclined to hire high-quality auditors; Secondly, institutional investors can reduce thecompany’s earnings management, which means the proportion of institutionalinvestors negatively correlated with the degree of earnings management. Thirdly,auditor choice has the mediating effect when institutional investors impact onearnings management. The paper has well demonstrated that institutional investorscan impact the auditor choice which is the external governance mechanisms to reduceearning management, then to improve the company’ governance effectiveness.