Does Mutual Fund Ownership Affect Financial Reporting Quality for Chinese Privately-Owned Enterprises?

Ann Ling-Ching Chan, Rong Ding, Wenxuan Hou

Research output: Contribution to journalArticlepeer-review

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 reducing the 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. This finding implies that mutual funds form an important part of the external governance mechanism in emerging countries, but this effect is moderated by state control and ownership.
Original languageEnglish
Pages (from-to)131-140
JournalInternational Review of Financial Analysis
Volume36
Early online date5 Mar 2014
DOIs
Publication statusPublished - Dec 2014

Keywords

  • institutional ownership
  • financial reporting quality
  • mutual fund ownership
  • modified auditor opinion
  • China

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