Research On The Relationship Between Earnings Management Of Listed Companies And Institutional Investors’ Shareholding

In the process of economic transformation, Chinese listed companies have some problems in their governance. Investor protection is not well performed, principal-agent problems are endemic. Earnings management is a prevalent and prominent issue for Chinese companies, which damage the interest of minority shareholders and is very harmful for the development of securities market. With the disclosure of Enron’s and WorldCom’s financial fraud, regulatory authorities gradually recognize that the supervision and restriction of earnings management has important theoretical and practical significance. It helps to regulate the internal management of listed companies and to improve their governance.Currently in China, exterior auditing and independent director systems do not play their due role. Therefore, China Securities Regulatory Commission learn from developed countries, such as the United States, and introduce institutional investors in our regulation practice, hopes to standardize companies’ operation. After 15 years since the strategy of developing institutional investors in extraordinary scale put forward, institutional investors’ investment gradually expand and they become an important part in capital market. Institutional investors have professional analysis and information gathering capabilities which small investors hardly have. Therefore, they are given high hopes in corporate governance. Analyze the effects of institutional investors and the interaction between institutional shareholding and earnings management, has theoretical and practical values.Based on theoretical analysis, we focus on A-share companies listed in Shanghai and Shenzhen stock exchange from 2009 to 2013. We analyze the interaction between real earnings management and institutional shareholding, using linear regression models and structural equation models to evaluate institutional investors’ influence, furthermore explore its path. After the systematic investigation, we reach the following conclusions:First, the relationship between institutional shareholding and earnings management is interactive. When institutional investors hold large proportion of listed companies’ share, they will have the ability to conduct oversight and monitor the behavior of listed companies, thereby inhibiting the earnings management problems. On the other hand, as shareholders, institutional investors will tend to choose companies with lower level of earnings management, and improve their corporate governance in the long run.Second, institutional investors have the ability to choose and create value. Institutional investors’ value selection reflects they are scientific and professional in their investment process. Value creation reflects that the participation of institutional investors will help to improve the management of companies in order to create more value. At this stage, the overall degree of specialization and value creation ability of institutional investors are still relatively low. We should diversify their investment by improving competition, establish a sound institutional investor evaluation mechanism, and promote healthy environment for institutional investors’ growth.Third, the impact of institutional investors act on earnings management through equity balance, limiting agent behaviors. As shareholders of listed companies, institutional investors can strengthen the balance of shareholding and inhibit the tunneling in the company, therefore alleviating both types of principal-agent problems. Institutional investors play a crucial role in corporate governanceAccording to the above conclusion, combined with the current market environment, in order to guide institutional investors play a better role in corporate governance and to inhibit earnings management, we propose several policy recommendations.