Institutional Investors’ Corporate Visit And Listed Companies’ Accounting Conservatism

Institutional investors have the most experienced internal research teams,professional operations,information and capital scaleadvantages.They have the ability and willingness to monitor corporate managers.Prior research focuses on thecharacteristics of institutional investors such as institutional ownership or their trading style,but research on institutional investors’ corporate visit is very limited.Researchers investigate the effect of corporate visit on earnings management,analyst forecast,price synchronicity,crash risk,accounting comparabilityand value relevance(Lin,2017[1];Wang,2017[2];Tan and Cui,2015[3];Cao and Jia,2015[4];Kong et al,2015[5];Li,2015[6];Zhang,2017[7]).So far,there is no research on the effect of corporate visit on accounting conservatism.Accounting conservatism requires recording bad news in a timelier fashion than that of good news,which reduces information asymmetry between investors and managers,and alleviating the conflict of interests between them.Corporate visits by intuitional investors occur with high frequency,which can increase the level of outside monitoring.Intuitively,corporate visit can help institutional investors observe the real situation of listed companies,such high level of external monitoring can reduce the possibility of lack of authenticity,sufficiency and accuracy,which is very helpful to enhance the level of accounting conservatism.Therefore,we predict that corporate visit increases the level of accounting conservatism.We further studywhether institutional investors’ corporate visit reduces the audit fee via increasing the level of accounting conservatism.Audit fee consists of the payment for auditors’ work,the risk premium and firm profit.Firms with lower level of accounting conservatism are more likely to report higher revenue and asset,and lower expense and liability,leading to more substantive tests and a higher audit risk premium charge.We predict that institutional investors’ corporate visit does reduce the firms’ audit fee when it enhances the firms’ accounting conservatism.In order to study the above issues,this paper uses A-share listed companies from 2013 to 2017 as the research sample,and empirically tests the positive impact of corporate visit on the level of accounting conservatism and audit fee.Firstly,this paper reviews the literature of institutional investors and corporate governance,the literature about accounting conservatism,and the literature of factors that affect audit fee.Then this paper analyzes the agency theory,the corporate governance theory,the investor protection theoryand the deep pocket theory,and sorts out the influence mechanism of institutional investor corporate visit and accounting conservatism.We use the C-Score measure of conservatism to test the hypothesis;we further adopt the mediating effect test to verify the mediating effect of conservatism on audit fee.There are two findings in this paper.The first one is that institutional investors’ visiting frequency is positively correlated with accounting conservatism,while the number of institutional investors involved in a visit has insignificant effect on accounting conservatism.The second one is that visiting frequency is negatively correlated with audit fee,and accounting conservatismhas mediating effect in this relation.This paper has two contributions.First,this paper is the first paper that study the effect of institutional investors’ corporate visit on accounting conservatism,thereby expanding the literature on factors influencing accounting conservatism and the literature on the economic consequences of institutional investors’ corporate visit.Second,the study is the first to examine the mediating effect of accounting conservatism on the relation between corporate visit and audit fee.This paper has implications for regulators,investors,and auditors.The findings of this paper suggest thatpolicy makers should encourage institutional investors to conduct corporate visit research.It also suggests thatinvestors can include the number of institutional investor visits as a factor when they assess the quality of accounting information of a company.It also has implications for auditors.When signing audit contracts andsetting audit fee,they can consider the frequency of institutional investor visits as a factor.