Mutual funds’ holdings and listed firms’ earnings management: Evidence from China

• Chinese long-term mutual funds’ holdings have an insignificant impact on accruals.
• Chinese short-term funds’ holdings encourage an increase in earnings management.
• Long- or short-term funds impact different earnings management measures differently.
• Funds’ impact on earnings management is stronger in non-state-controlled firms.

This study examines the impact of long-term and short-term mutual funds’ ownership on various types of earnings management in China. We find that both long-term and short-term funds’ holdings can lead to reduced non-core income. However, long-term mutual funds’ holdings have an insignificant impact on accrual items, while short-term funds’ holdings encourage an increase in accruals. The positive influence of short-term funds’ holdings on accruals is much stronger than their negative impact on non-core income. Finally, we find the impact of mutual funds’ holdings on earnings management is much stronger in non-state-controlled listed firms than that in state-controlled ones.