Does mutual fund ownership affect financial reporting quality for Chinese listed privately-owned enterprises?

Chan, Ann Ling-Ching, Ding, Rong and Hou, Wenxuan (2014) Does mutual fund ownership affect financial reporting quality for Chinese listed privately-owned enterprises? International Review of Financial Analysis. (doi:10.1016/j.irfa.2014.02.004). (In Press)

Record type: Article

Abstract

This paper examines the role of mutual funds in enhancing financial reporting quality in China.Mutual funds are more sophisticated and influential than individual investors. Therefore, they are expected to be more effective at preventing executives from expropriating investors and manipulating earnings as a cover-up, which in turn would reduce the incidence of modified audit opinions (MAOs). Our results, based on the Chinese listed firms from 2003 to 2008, confirm this prediction. More importantly, the effects of mutual fund ownership in reducingthe incidence of MAOs are greater among privately owned enterprises (POEs), and especially those with higher growth. This is because POEs rely more heavily on the capital market for financing than do state-owned enterprises (SOEs), and because growth opportunities need to be funded by additional external capital. The finding implies thatmutual funds form an important part of the external governance mechanismin emerging countries, but this effect is moderated by state control and ownership.

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