Institutional investor networks and earnings management: The role of the exit threat

Abstract

This study examines the potential of institutional investor networks in mitigating horizontal agency conflicts, addressing the gap in the regulatory role of institutional investors in concentrated equity markets. Using data on Chinese listed companies from 2007 to 2020, we employ the multiplex network method to investigate the impact of institutional investor networks on earnings management. Our findings reveal a significant negative correlation between institutional investor networks and earnings management. The mechanism analysis indicates that institutional investor networks primarily exert governance through the exit threat rather than through direct intervention and information dissemination. Collectively, our findings elucidate the important role of institutional investors in corporate governance and promote the application of multiplex network theory to the financial field.