Information Asymmetry, Mutual Fund And Earnings Quality: Evidences From China

This paper chooses the listed companies in Shanghai and Shenzhen Exchange fromthe2004to2010as the sample, using the model from Dechow and Dichev (2002) tocalculate the earnings quality and distinguish positive and negative earnings management.We choose Sd as the measure of information asymmetry, and according to the fundclassification method from Yan and Zhang (2009), we reclassify the mutual fund aslong/short term fund, whose shareholding ratio is respectively used as the measure ofinstitutional ownership. Then controlling fundamental and corporate governance variables,we investigate how the information asymmetry and long/short-term mutual fund affect thelisted companies’earnings quality.The results show that:(1) The decrease of information asymmetry has positiverelations with improving earnings quality.(2) We reclassify the mutual fund, and find thatthe long-term fund promote earnings quality through supervising management’s governbehavior, but the short-term fund who focus on immediate interest will worsen earningsquality by management’s earnings manipulation.(3) Dividing information asymmetry intotwo groups, we find with the poorer information environment, the worse long-term fundsupervision effect and the stronger short-term fund speculation effect, both exacerbateearnings quality. In this paper, we provide new evidence for the role which institutionalinvestors play in our capital market. Meanwhile, our results have clear policy implications,that is, improving information transparency is of great importance on elevating thesupervision of earnings quality and lightening the manipulation of earnings quality whenlong/short-term institutions hold stocks.