5. Conclusion
This study addresses the following questions: does earnings management influence the trading behaviors of investors prior to earnings announcements? If so, is there any difference between institutional and individual investors? The importance of earnings management in the decision-making process of market participants and the mixed results on the information advantages of institutional investors must be further explored.
We address these issues by using a unique account-level trading data set from the Chinese stock market. First, the results show that institutions, particularly active ones, sell stocks before negative news and buy stocks before good news. Second, institutions intensively buy stocks with the lowest earnings management and highest earnings surprises during the pre-event period, and the trading patterns of institutions are primarily driven by active institutions. Third, our natural experiment validates the robustness of the causality in our findings.
To the best of our knowledge, this study is the first to directly investigate the aforementioned issues. Our findings present clear implications that emphasize the significance of earnings management in investment decisions, particularly those of institutional investors. These implications may be of interest to regulators who aim to strengthen the earnings management of listed firms and to protect the interests of individual shareholders.
