Study on the monitoring role of institutional investors in deterring accounting fraud

Abstract

The topic about institutional investor being a monitoring role has been widely discussed but different results exist in previous empirical studies. Along with their progressively development, institutional investors are now playing more important role in Chinese capital market. Using samples from Chinese capital market, this paper collects fraud data and data of mutual funds' ownership in listed firms between 2008 and 2015 to examine the monitoring function of institutional investors against accounting fraud. To go deep into the monitoring incentives of investors that fall into different categories, mutual funds are further classified as heterogeneous groups according to their investment strategy and investment durations. The monitoring role of mutual funds in different groups and their influence as the disincentive to accounting fraud of listed firms are investigated in the paper. Mutual fund ownership is found to be able to curb the incidence of accounting fraud. Active mutual funds are able to conduct more effective monitoring when compared with passive mutual funds. It is also reported that short-term mutual funds are more significant than long-term mutual funds in monitoring. Policy makers may need to normalize institutional investments by quantified indicators or in other reasonable ways.