Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

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

Liu, Shasha
China Finance Review International , Volume 9 (1): 29 – Feb 20, 2019
Download PDF
29 pages

Loading next page...
 
/lp/emerald-publishing/earnings-management-and-institutional-investor-trading-prior-to-t8ZDpqB8S9
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 International – Emerald Publishing

Published: Feb 20, 2019

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

References

  • Earnings quality, insider trading, and cost of capital
    Aboody, D.; Hughes, J.; Liu, J.
  • Institutional stakeholdings and better-informed traders at earnings announcements
    Ali, A.; Klasa, S.; Li, O.Z.
  • Do mutual funds profit from the accruals anomaly?
    Ali, A.; Chen, X.; Yao, T.; Yu, T.
  • Investor trading and the post-earnings-announcement drift
    Ayers, B.C.; Li, O.Z.; Yeung, P.E.
  • Stock price reaction to evidence of earnings management: implications for supplementary financial disclosure
    Baber, W.R.; Chen, S.; Kang, S.-H.
  • Earnings quality in UK private firms: comparative loss recognition timeliness
    Ball, R.; Shivakumar, L.
  • The role of accruals in asymmetrically timely gain and loss recognition
    Ball, R.; Shivakumar, L.
  • Accruals management, investor sophistication, and equity valuation: evidence from 10-Q filings
    Balsam, S.; Bartov, E.; Marquardt, C.
  • R&d budgets and corporate earnings targets
    Bange, M.M.; De Bondt, W.F.
  • Investor sophistication and patterns in stock returns after earnings announcements
    Bartov, E.; Radhakrishnan, S.; Krinsky, I.
  • The conservatism principle and the asymmetric timeliness of earnings1
    Basu, S.
  • Earnings expectations, investor trade size, and anomalous returns around earnings announcements
    Battalio, R.H.; Mendenhall, R.R.
  • Political connections and minority-shareholder protection: evidence from securities-market regulation in China
    Berkman, H.; Cole, R.A.; Fu, L.J.
  • Post-earnings-announcement drift: delayed price response or risk premium?
    Bernard, V.L.; Thomas, J.K.
  • Investors’ trade size and trading responses around earnings announcements: an empirical investigation
    Bhattacharya, N.
  • Do analysts and auditors use information in accruals?
    Bradshaw, M.T.; Richardson, S.A.; Sloan, R.G.
  • The influence of institutional investors on myopic R&D investment behavior
    Bushee, B.J.
  • Caught on tape: institutional trading, stock returns, and earnings announcements
    Campbell, J.Y.; Ramadorai, T.; Schwartz, A.
  • Short-selling prior to earnings announcements
    Christophe, S.E.; Ferri, M.G.; Angel, J.J.
  • Institutional monitoring and opportunistic earnings management
    Chung, R.; Firth, M.; Kim, J.-B.
  • Investor sophistication and the mispricing of accruals
    Collins, D.W.; Gong, G.; Hribar, P.
  • Is accruals quality a priced risk factor?
    Core, J.E.; Guay, W.R.; Verdi, R.
  • The quality of accruals and earnings: the role of accrual estimation errors
    Dechow, P.M.; Dichev, I.D.
  • Detecting earnings management
    Dechow, P.M.; Sloan, R.G.; Sweeney, A.P.
  • Individual large shareholders, earnings management, and capital-market consequences
    Dou, Y.; Hope, O.K.; Thomas, W.B.; Zou, Y.
  • Quarterly accounting data: time-series properties and predictive-ability results
    Foster, G.
  • Earnings releases, anomalies, and the behavior of security returns
    Foster, G.; Olsen, C.; Shevlin, T.
  • The market pricing of accruals quality
    Francis, J.; Lafond, R.; Olsson, P.; Schipper, K.
  • Earnings management before ipos: are institutional investors misled?
    Gao, S.; Meng, Q.; Chan, K.C.; Wu, W.
  • Institutional investors’ reaction to sec concerns about ifrs and us gaap reporting
    Gietzmann, M.B.; Isidro, H.
  • Examining the dark side of financial markets: do institutions trade on information from investment bank connections?
    Griffin, J.M.; Shu, T.; Topaloglu, S.
  • Who drove and burst the tech bubble?
    Griffin, J.M.; Harris, J.H.; Shu, T.; Topaloglu, S.
  • A league of their own? Financial analysts’ responses to restatements and corrective disclosures
    Griffin, P.A.
  • Institutional investors and equity prices: information, behavioral bias, and arbitrage
    Han, B.; Kong, D.M.
  • A test of the extended functional fixation hypothesis
    Hand, J.R.M.
  • Challenges for implementation of fair value accounting in emerging markets: evidence from China
    He, X.; Wong, T.; Young, D.
  • Do individual investors cause post-earnings announcement drift? Direct evidence from personal trades
    Hirshleifer, D.A.; Myers, J.N.; Myers, L.A.; Teoh, S.H.
  • Institutional ownership and the extent to which stock prices reflect future earnings
    Jiambalvo, J.; Rajgopal, S.; Venkatachalam, M.
  • Earnings management during import relief investigations
    Jones, J.J.
  • Individual investor trading and stock returns
    Kaniel, R.; Saar, G.; Titman, S.
  • Individual investor trading and return patterns around earnings announcements
    Kaniel, R.O.N.; Liu, S.; Saar, G.; Titman, S.
  • How informed are actively trading institutional investors? Evidence from their trading behavior before a break in a string of consecutive earnings increases
    Ke, B.; Petroni, K.
  • Do institutional investors exploit the post-earnings announcement drift?
    Ke, B.; Ramalingegowda, S.
  • Estimation and empirical properties of a firm-year measure of accounting conservatism
    Khan, M.; Watts, R.L.
  • Performance matched discretionary accrual measures
    Kothari, S.P.; Leone, A.J.; Wasley, C.E.
  • Inferring trade direction from intraday data
    Lee, C.M.C.; Ready, M.J.
  • Can managers use discretionary accruals to ease financial constraints? Evidence from discretionary accruals prior to investment
    Linck, J.S.; Netter, J.; Shu, T.
  • Comparing the post-earnings announcement drift for surprises calculated from analyst and time series forecasts
    Livnat, J.; Mendenhall, R.R.
  • The quality of accruals and earnings: the role of accrual estimation errors: discussion
    McNichols, M.F.
  • Does earnings management affect firms’ investment decisions?
    McNichols, M.F.; Stubben, S.R.
  • The pricing of accruals quality: January versus the rest of the year
    Mashruwala, C.A.; Mashruwala, S.D.
  • Institutional stock ownership, accrual management, and information environment
    Mitra, S.; Cready, W.M.
  • Financial reporting quality and idiosyncratic return volatility
    Rajgopal, S.; Venkatachalam, M.
  • Consecutive earnings surprises: small and large trader reactions
    Shanthikumar, D.M.
  • Analysis of earnings management influence on the investment efficiency of listed chinese companies
    Shen, C.-H.; Luo, F.; Huang, D.
  • Institutional investor participation and stock market anomalies
    Shu, T.
  • Do stock prices fully reflect information in accruals and cash flows about future earnings?(digest summary)
    Sloan, R.
  • The pricing of discretionary accruals
    Subramanyam, K.
  • Investor sophistication and market earnings expectations
    Walther, B.R.
  • Founding family ownership and earnings quality
    Wang, D.
  • The mispricing of abnormal accruals
    Xie, H.
  • Institutional investors and equity returns: are short-term institutions better informed?
    Yan, X.; Zhang, Z.
  • How do accounting standards and insiders’ incentives affect earnings management? Evidence from China
    Zhang, Y.; Uchida, K.; Bu, H.
  • Do retail trades move markets?
    Barber, B.M.; Odean, T.; Zhu, N.
  • Can earnings management ease financial constraints? Evidence from earnings management prior to investment
    Linck, J.S.; Netter, J.; Shu, T.