Institutional Investor Cliques And Earnings Management

Earnings management reflects the quality of accounting information and the effectiveness of corporate governance.Existing researches proved that institutional investors',coordination improves corporate governance and helps to reduce earning management.Institutional investors coordinate in two ways.One is via "voice" and another is via threat of exit.In China,due to the highly concentrated ownership structure and the policy restrictions on institutional holding proportion,institutional investors are more likely to monitor management behaviors by "voting with feet".The majority of relevant literatures assumed institutional investors to be isolated units,who make decisions on their own.However,institutional investors do not act independently.Recent evidences suggest that institutional investors work together to make investment decisions.This study uses the Louvain Algorithm to identify the investor groups(cliques)that may work together to influence the firms they own.By analyzing the data of Chinese A-shares over the period of 15 years(2003-2017),this study concluded that cliques of institutional investors reduce the threat of exit and increase the earnings management behaviors.The China Securities Regulatory Commission(CSRC)promulgated policy to allow insurance funds entering the stock market in Oct 2004.This endogenous event is used to construct instrumental variable to prove that this impact is causal.The conclusion still holds based on the model of two-stage least squares(2SLS).