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

37 Pages Posted: 14 May 2013 Last revised: 10 Feb 2014

See all articles by Ann Ling‐Ching Chan

Ann Ling‐Ching Chan

National Chengchi University (NCCU)

Rong Ding

University of Warwick

Wenxuan Hou

University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Date Written: January 12, 2014

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.

Keywords: Institutional ownership, financial reporting quality, mutual fund ownership, modified auditor opinion, China.

JEL Classification: G30, G23

Suggested Citation

Chan, Ann and Ding, Rong and Hou, Wenxuan, Does Mutual Fund Ownership Affect Financial Reporting Quality for Chinese Privately-Owned Enterprises? (January 12, 2014). International Review of Financial Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2264073 or http://dx.doi.org/10.2139/ssrn.2264073

Ann Chan

National Chengchi University (NCCU) ( email )

#64, Chih-Nan Rd. Sec. 2
Wen-Shan District
Taipei, 116
Taiwan

Rong Ding

University of Warwick ( email )

Warwick Business School
University of Warwick
Coventry, CV4 7AL
United Kingdom

Wenxuan Hou (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

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