Knowledge is Power: The Importance of Public Accounting Experience to Mutual Fund Managers’ Monitoring

Posted: 20 Oct 2020

See all articles by Yangyang Chen

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy

Jun Huang

Shanghai University of Finance and Economics

Ting Li

Shanghai University of International Business and Economics

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: July 27, 2020

Abstract

We document that firms held by mutual fund managers who worked in public accounting earlier in their careers exhibit higher quality financial reporting. In cross-sectional evidence consistent with expectations, we find that the role that fund manager public accounting experience plays is magnified when: the firm suffers more severe agency problems, firm information asymmetry is worse, the fund has a longer investment horizon, fund managers formerly worked at large accounting firms, and fund managers have social connections with corporate executives. Additional evidence implies that fund managers with public accounting experience are more likely to conduct site visits to their portfolio firms and discuss accounting topics when there. Firms’ earnings management subsides after site visits by these fund managers, particularly when they raise accounting issues during their visits. Overall, our evidence suggests that fund managers with public accounting experience impose stricter external monitoring on their portfolio firms’ financial reporting.

Keywords: Mutual fund manager; Public accounting experience; Earnings management

JEL Classification: G23, G34, M40

Suggested Citation

Chen, Yangyang and Huang, Jun and Li, Ting and Pittman, Jeffrey A., Knowledge is Power: The Importance of Public Accounting Experience to Mutual Fund Managers’ Monitoring (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=3661649

Yangyang Chen (Contact Author)

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Jun Huang

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Ting Li

Shanghai University of International Business and Economics ( email )

No. 1900, Wenxiang Road
Shanghai, 201620
China

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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