Yurou Liu, of the Southwest Jiaotong University and Huaxia Chen of the Renmin University wondered if the degree of retail investor attention directed toward a company had a proportional effect on that company’s tendency to manipulate earnings?
This question is particularly pertinent in China where so much of the turnover is due to retail investors and where the large investing institutions tend not to hold positions over longer periods.
Both the Shanghai and Shenzhen stock markets support interactive message boards [HKEX please take note!] where investors can address questions to companies who are expected to respond promptly to inquiry. From these the researchers were able to compile a directory of interest.
Some research has posited that greater interest by investors may result in better corporate governance, but this study concludes “..small investors may not effectively serve as monitors to curtail managerial opportunistic behavior, but instead contribute to managerial myopia.”
In short the paper concludes that increased investor attention results in a higher degree of earnings manipulation and that this effect is particularly acute among firms “..with higher financial constraints and firms
with weak legal environments.”
The actionable point for practitioners is to be reminded that sunlight may not always be the best disinfectant. Too much may flag a company prone to earnings manipulation to satisfy heightened short term expectations.
You can access the paper in full via this link Does Retail Investor Attention Deter or Promote Earnings Management?
Happy Sunday