The purpose of this paper is to investigate if earnings management affects the trades of different investors prior to earnings announcements.
Using a unique account-level trading data set from the Chinese stock market, the author investigates the different investor trading patterns prior to earnings announcements.
The author obtains direct evidence to show that: first, institutional investors, particularly active ones, tend to sell (buy) stocks before negative (positive) earnings surprises; second, institutional investors buy stocks intensively with the lowest earnings management and the highest earnings surprises, and the trading patterns are primarily driven by active institutions. No significant trading pattern is observed on the stocks with negative earnings surprises; and third, the author uses a natural experiment in accordance with the Chinese accounting standards reform to address endogeneity, and the causality of the results still holds.
The findings provide clear evidence by emphasizing the importance of earnings management in the formulation of investor decisions.
The author wishes to acknowledge financial support from the National Natural Science Foundation of China (NSFC Grant Nos 71602074, 71772178, 71372130).
Liu, S. (2019), "Earnings management and institutional investor trading prior to earnings announcements", China Finance Review International, Vol. 9 No. 1, pp. 22-50. https://doi.org/10.1108/CFRI-01-2018-0010Download as .RIS
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