Early studies have showed that institutional investors help improve corporate governance by reducing the level of earnings management. Based on recent new measurement of earnings management, this article further studies whether institutional investors can help curb earnings management through real activities manipulation. The results show levels of real earnings management in Chinese state-owned companies are significantly higher than those in non-state-owned companies. Thus it indicates institutional investors have inhibitory effect on real earnings management, but their roles in state-owned companies have been restricted to a certain extent. The conclusions of this research have meaningful instruction to corporate governance and reform of Chinese state-owned enterprises as well as reform of Chinese property rights system.
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