Abstract
This paper explores the impact of accrual quality information on fund investment decisions, and examines whether fund managers can use the stock’s accrual quality information to obtain excess returns, and the difference in fund manager’s skill to influence the extent of the fund’s excess returns. This paper uses the annual observations of 2851 Chinese funds, from 2005 to 2016 to analyze the fund manager’s stock investment decision. The results show that in China capital market, there is a risk premium for accrual quality, and fund managers can obtain excess returns through selecting stocks with poor accrual quality. And fund managers with better skill, can obtain more excess returns.
Highlights
Mutual fund market in China has seen huge changes since the government proposed to develop institutional investors in 2000
This paper explores the impact of accrual quality information on fund investment decisions, and examines whether fund managers can use the stock’s accrual quality information to obtain excess returns, and the difference in fund manager’s skill to influence the extent of the fund’s excess returns
The results show that in China capital market, there is a risk premium for accrual quality, and fund managers can obtain excess returns through selecting stocks with poor accrual quality
Summary
Mutual fund market in China has seen huge changes since the government proposed to develop institutional investors in 2000. Based on the information risk theory, poor accounting information (such as the earning quality) will undermine the cooperative relationship between the company and investors in the capital investment decision, resulting in information risk. To provide evidence that Chinese fund managers have stock-selecting ability, and high skilled managers can gain more accrual quality risk premium (AQ premium). This paper further investigates whether fund managers in China use earnings quality information to perform portfolio asset allocation and the impact of fund managers’ own investment skills on their use of earnings information. This will allow us to understand more fully the economic.
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