The Effect Of Institutional Investors On Earnings Management

The issue of corporate earnings management has always been the focus of academia and practice.Scholars have studied the causes and influencing factors of earnings management from different perspectives,aiming to prevent and restrain the company's earnings management behavior by all means.Reducing their holdings of the stock by the important stockholders has an important influence on the company and other stakeholders.Arbitrage is also one of the important motivations for corporate earnings management.This article is based on the review of relevant literature of domestic and abroad,it takes ZT,an A-share listed company,as an example to analyze and investigate the relationship and mechanism between institutional investor reduction and earnings management.Firstly,it is summarized from three aspects: the overview of earnings management,the motivation of shareholder reduction,and the correlation between them.Afterwards,from the perspective of economic theory,in order to avoid higher risks and ensure their interest maximization,the Principal-agent Theory led institutional investors to smooth profits;In order to achieve speculative arbitrage,the manager and institutional investors which are major shareholders fabricate false information and implement earnings management to deceive external investors because of Asymmetric Information Theory.This case study finds that the company's net profit showed negative growth in the past and following years.And only before the institutional investors reduced their shares,the net profit increased nearly 5 times in the semi-annual report.But this growth is not caused by the company's business.It shows the following points: Firstly,The corporate changes the use of raised funds.Zhongtai abandon higher-income projects and choose to invest in financial products,the reason is that financial investment can control the time points of earnings.This allows the income of investment to be disclosed in the mid-year report to increase profits before the share reduction of the institution investors.Secondly,the company announced changes in accounting estimates.The company has extended the useful life of buildings,machinery and equipment,which will bring 100 million profits to the company.Thirdly,corrections of prior period errors were announced.The report discloses the corrections of the previous year.This will significantly increase the income and net profit of the income statement.Through the above analysis of earnings management,I find that it was all about the disclosure of company's report in 2014.They make the company's net profit increase significantly in 2014 and become the company which had the highest profit growth rate in the industry.Institutional investors exited the company in September of that year.These outstanding results will undoubtedly enhance investors' confidence in the company and thus drive up the share price.The increase in stock prices will bring large benefits to institutional investors.In summary,I finally conclude that the reduction of institutional investors will stimulate the emergence of corporate earnings management.It can be used as a recommendation for the government to improve the management of earnings management and targeted additional issuance mechanisms.