Abstract
The topic about institutional investor being a monitoring role has been widely discussed but different results exist in previous empirical studies. Along with their progressively development, institutional investors are now playing more important role in Chinese capital market. Using samples from Chinese capital market, this paper collects fraud data and data of mutual funds’ ownership in listed firms between 2008 and 2015 to examine the monitoring function of institutional investors against accounting fraud. To go deep into the monitoring incentives of investors that fall into different categories, mutual funds are further classified as heterogeneous groups according to their investment strategy and investment durations. The monitoring role of mutual funds in different groups and their influence as the disincentive to accounting fraud of listed firms are investigated in the paper. Mutual fund ownership is found to be able to curb the incidence of accounting fraud. Active mutual funds are able to conduct more effective monitoring when compared with passive mutual funds. It is also reported that short-term mutual funds are more significant than long-term mutual funds in monitoring. Policy makers may need to normalize institutional investments by quantified indicators or in other reasonable ways. Key words: Accounting fraud, institutional investors, investment duration, monitoring role.
Highlights
Corporate governance of listed firms has always been an issue of concern in both finance and accounting literature as poor corporate governance may have serious impacts on listed firms as well as a large number of investors, even the operation of capital market
By dividing institutional investors into different categories, this study looks into the impacts of different types of institutions‟ monitoring function against accounting fraud
Mutual fund ownership as a whole can curb the incidence of accounting fraud of listed firms in Chinese capital markets
Summary
Corporate governance of listed firms has always been an issue of concern in both finance and accounting literature as poor corporate governance may have serious impacts on listed firms as well as a large number of investors, even the operation of capital market. Poor corporate governance consists of poor monitoring and poor decisions. The poor monitoring and weak control systems can negatively impact the company‟s performance and value. Poor decisions can lead to failure in the evaluation of performance and companies might face difficulties with future forecasting and cash flow planning. Discussions on this topic are varied and complex and the focal points of their work has covered issues related to transparency and responsibility of listed firms, board structure, etc. The failure in corporate governance often comes with a series of irregular behaviors of listed firms and one of the most important irregularities is accounting fraud.
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