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Earnings management and institutional investor trading prior to earnings announcements

Earnings management and institutional investor trading prior to earnings announcements The purpose of this paper is to investigate if earnings management affects the trades of different investors prior to earnings announcements.Design/methodology/approachUsing a unique account-level trading data set from the Chinese stock market, the author investigates the different investor trading patterns prior to earnings announcements.FindingsThe author obtains direct evidence to show that: first, institutional investors, particularly active ones, tend to sell (buy) stocks before negative (positive) earnings surprises; second, institutional investors buy stocks intensively with the lowest earnings management and the highest earnings surprises, and the trading patterns are primarily driven by active institutions. No significant trading pattern is observed on the stocks with negative earnings surprises; and third, the author uses a natural experiment in accordance with the Chinese accounting standards reform to address endogeneity, and the causality of the results still holds.Originality/valueThe findings provide clear evidence by emphasizing the importance of earnings management in the formulation of investor decisions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Earnings management and institutional investor trading prior to earnings announcements

China Finance Review International , Volume 9 (1): 29 – Feb 20, 2019

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2044-1398
DOI
10.1108/cfri-01-2018-0010
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to investigate if earnings management affects the trades of different investors prior to earnings announcements.Design/methodology/approachUsing a unique account-level trading data set from the Chinese stock market, the author investigates the different investor trading patterns prior to earnings announcements.FindingsThe author obtains direct evidence to show that: first, institutional investors, particularly active ones, tend to sell (buy) stocks before negative (positive) earnings surprises; second, institutional investors buy stocks intensively with the lowest earnings management and the highest earnings surprises, and the trading patterns are primarily driven by active institutions. No significant trading pattern is observed on the stocks with negative earnings surprises; and third, the author uses a natural experiment in accordance with the Chinese accounting standards reform to address endogeneity, and the causality of the results still holds.Originality/valueThe findings provide clear evidence by emphasizing the importance of earnings management in the formulation of investor decisions.

Journal

China Finance Review InternationalEmerald Publishing

Published: Feb 20, 2019

Keywords: Earnings management; Earnings announcements; Institutional investor; Investor trading; G14; G23

References