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Institutional Investors, Real Earnings Management and Cost of Equity: Evidence from Listed High-tech Firms in China

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  • Han Gao
  • Zhuyi Shen
  • Yichen Li
  • Xuxin Mao
  • Yukun Shi

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.

Suggested Citation

  • Han Gao & Zhuyi Shen & Yichen Li & Xuxin Mao & Yukun Shi, 2020. "Institutional Investors, Real Earnings Management and Cost of Equity: Evidence from Listed High-tech Firms in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(14), pages 3490-3506, November.
    • Handle: RePEc:mes:emfitr:v:56:y:2020:i:14:p:3490-3506
    DOI: 10.1080/1540496X.2019.1650348
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    Cited by:

    1. Wan, Guochao & Zhang, Weike & Li, Chao, 2024. "How does low-carbon city pilot policy catalyze companies toward ESG practices? Evidence from China," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 1593-1607.
    2. Mubashar Tanveer & Mohsin Altaf & Zahid Ali Akbar & Uzma Nisar, 2022. "Influence of Advertising Intensity on Real Earnings Management: Evidence from Four Sectors of Pakistan," Journal of Economic Impact, Science Impact Publishers, vol. 4(1), pages 158-164.
    3. Khayria Amarna & Raquel Garde Sánchez & Maria Victoria López‐Pérez & Mahmoud Marzouk, 2024. "The effect of environmental, social, and governance disclosure and real earning management on the cost of financing," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3181-3193, July.
    4. Ma, Guangyuan & Wang, Yihong & Xu, Yekun & Zhang, Limin, 2023. "The breadth of ownership and corporate earnings management," Finance Research Letters, Elsevier, vol. 52(C).
    5. Yizhao Hong & Chongyan Cao, 2023. "Institutional Investors’ Distraction and Executive Compensation Stickiness Based on Multiple Regression Analysis," JRFM, MDPI, vol. 16(2), pages 1-21, February.

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