Institutional Investors’ Shareholdings, Corporate Growth And Earnings Management

China’s capital market has developed fast in recent years, and has become a crucial channel for social resources allocation, in which process investors of capital market rely largely on information disclosed by listed companies, with earnings management referred to the most. However, the management of listed companies is usually impelled by multiple motivations to manage earnings information on accounting items, which impedes the authenticity and reliability of accounting information. Earnings management roots from principal agent theory, and can to some extent cater to short term goals of stakeholders involved. Therefore, there are some obstacles in the implementation of governance mechanism on earnings management. Nevertheless, increasing institutional investors, with their sound profession and capital resources, can make continuous research on listed companies, discovering problems in their management in a timely manner.This dissertation, taking listed companies which have institutional investors as stakeholders as research subjects, starting with the institutional investors’shareholding characteristics, examines whether they are able to identify companies with sound growth rate of net profits and operating cash flow and make long term investment on these companies. And on this basis, the dissertation digs into relation between the features of the institutional investors’ shareholding and earnings management, and finally, different impacts of the former on the latter under different growth models. Taking the 2691 A-share listed companies which are invested by institutional investors in the 2007-2014 Shanghai and Shenzhen main board exchange as sample, this dissertation firstly researches into the relation between the shareholding ratio and duration of institutional investors and these companies’growth nature based on the growth rate of their profits and operating cash flow, as well as their earnings management. Based on this, four growth models are identified according to the nature of their growth:sound profit growth with sound cash flow growth, sound profit growth with bad cash flow growth, bad profit growth with sound cash flow growth, and bad profit growth with bad cash flow growth. The dissertation then discusses impacts of different growth models on the extents of influence of institutional investors’ shareholding characteristics on earnings management, with special attention paid to positive earnings management. Regarding the measurement of earnings management, major attention is attached to the discretionary accruals.Through empirical studies, it is discovered that institutional investors prefer companies with sound growth, especially those with higher growth ratio of net incomes and operating cash flow, for which they are more likely to increase their shareholding ratio and duration. It means that institutional investors can accurately identify the companies with sound growth by its technology, capital and information superiority, and then decide to increase their proportion and duration of shareholding. Shareholding duration and earnings management was significantly negatively correlated, but the proportion of shareholding was significantly positively correlated with earnings management. Increasing the proportion of shareholding does not suppress earnings management at all, which shows that simply relying on stake proportion to distinguish active investor from negative investor is one-sided. The fact is, to some extent, institutional investors increase their stock proportion only for short-term speculation, which may condone or even encourage enterprises to enhance earnings management. Extending institutional investors’ shareholding duration can suppress earnings management, indicating that long-term holding is possibly an important indicator of positive investors. In the samples of positive earnings management, companies with good growth can increase the proportion of institutional investors, shareholding duration for earnings management inhibition, indicating that institutional investors choosing to hold the stock of companies with better growth are attracted by the company’s potential and long-term development. With the increase of their stake proportion and holding duration, for the long-term interests, they will be more actively involved in corporate governance and limiting earnings management which would undermine long-term profit.