Knowledge is Power: The Importance of Public Accounting Experience to Mutual Fund Managers’ Monitoring
Posted: 20 Oct 2020
Date Written: July 27, 2020
We document that firms held by mutual fund managers who worked in public accounting earlier in their careers exhibit higher quality financial reporting. In cross-sectional evidence consistent with expectations, we find that the role that fund manager public accounting experience plays is magnified when: the firm suffers more severe agency problems, firm information asymmetry is worse, the fund has a longer investment horizon, fund managers formerly worked at large accounting firms, and fund managers have social connections with corporate executives. Additional evidence implies that fund managers with public accounting experience are more likely to conduct site visits to their portfolio firms and discuss accounting topics when there. Firms’ earnings management subsides after site visits by these fund managers, particularly when they raise accounting issues during their visits. Overall, our evidence suggests that fund managers with public accounting experience impose stricter external monitoring on their portfolio firms’ financial reporting.
Keywords: Mutual fund manager; Public accounting experience; Earnings management
JEL Classification: G23, G34, M40
Suggested Citation: Suggested Citation