Institutional investors, real earnings management and cost of equity: Evidence from listed high-tech firms in China

Gao, H., Shen, Z., Li, Y., Mao, X. and Shi, Y. (2020) Institutional investors, real earnings management and cost of equity: Evidence from listed high-tech firms in China. Emerging Markets Finance and Trade, 56(14), pp. 3490-3506. (doi: 10.1080/1540496x.2019.1650348)

Abstract

This paper investigates the association between real earnings management and the cost of equity from the perspective of the heterogeneity of institutional investors. Based on a sample of publicly listed high-tech firms in China from 2008 to 2017, our empirical results suggest that there is a significant negative correlation between earnings management and the cost of equity capital. This finding is contrary to previous conclusion, indicating that, in China, real earnings management cannot be effectively identified by external investors, and the company could easily obtain financing from the capital market and reduce its cost of equity due to its masked excellent performance by manipulating the real earnings management. Furthermore, we find that compared with transient institutional investors, stable institutional investors with the intention of holding the stock for the long-term can effectively reduce the cost of equity. Our results also show that real earnings management under the supervision of stable institutional investors could be more easily identified by shareholders and stable institutional investors could diminish the impact of earnings management on the cost of equity.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Shi, Dr Yukun
• Authors: Gao, H., Shen, Z., Li, Y., Mao, X., and Shi, Y.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Emerging Markets Finance and Trade
• Publisher: Taylor & Francis
• ISSN: 1540-496X
• ISSN (Online): 1558-0938
• Published Online: 19 August 2019
• Copyright Holders: Copyright © 2019 Taylor and Francis Group, LLC
• First Published: First published in Emerging Markets Finance and Trade 56(14):3490-3506
• Publisher Policy: Reproduced in accordance with the publisher copyright policy