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informative component of earnings for managers’ income smoothing should reveal
differential patterns. Based on the incremental monitoring costs resulted from QFIIs’
disadvantage in home-court familiarity and the distance of geographic proximity, we
conjecture that QFIIs should focus on the short-term trading and therefore forego the
monitoring of managerial opportunistic earnings reporting. Prior studies (e.g., Bhide, 1993;
Koh, 2007; Yan and Zhang, 2009) find that frequent trading and the fragmented ownership
by institutional investors discourage such investors from becoming actively involved in the
corporate governance of their portfolio firms. The excessive focus on current earnings by
such institutions creates incentives for managers to aggressively manage earnings (Porter,
1992). Consequently, firms with higher QFIIs ownership are likely to reduce the informative
component of earnings with income smoothing. Accordingly, this study develops the first
hypothesis as follows:
Hypothesis 1: Ceteris paribus, the earnings informativeness for firms with income
smoothing is reduced when the firms have high QFIIs’ ownership.
However, Chen et al. (2007) argued that examining total institutional ownership by
various types of institutions masks important variation in the subset of trading or monitoring
institutions. They documented that the long-term institutional investors can specialize in
monitoring and influencing efforts rather than trading profit. Koh (2007) also finds that long-
term institutional investors constrain accruals management among firms that manage
earnings to meet/beat earnings benchmarks. Thus, the trading behavior (long-term vs. short-
term oriented) of QFIIs is likely to be an important issue in examining the role of these
institutions on managerial earnings reporting. We use QFIIs’ shareholdings volatility to
measure QFIIs’ trading behavior and conjecture that the more shareholdings volatility, the
more possible the QFIIs are short-term oriented traders. This study conjectures that the short-
term oriented trading QFIIs, which is proxied by the high QFIIs’ shareholdings volatility,
will play a less monitoring role, in turn, deteriorates the informative component of earnings
for firms with income smoothing. However, in the low QFIIs shareholdings volatility case,
the long-term oriented investing strategy may enhance the monitoring role of QFIIs and it
may improve the informative component of earnings for firms with income smoothing. In
other words, the negative association between earnings informativeness for firms with
income smoothing and high QFIIs’ ownership (i.e., Hypothesis 1) will be supported in the
high shareholdings volatility, yet, will be mitigated for firms with low shareholdings
volatility. According to the above, this study establishes the following hypotheses: