LAUSR

Abstract This paper examines the effect of mutual fund investments on financial reporting quality by focusing on their affiliation with firms. Using Korean public companies between 2008 and 2014, we find that firms tend to have greater discretionary accruals when they are invested by mutual funds that are in the same business group. We further show that investments from affiliated mutual funds increase the likelihood of income-increasing earnings management while decreasing income-decreasing earnings management. However, the results suggest that mutual fund investment itself does not affect financial reporting quality. Our findings are robust with various model specifications and to endogeneity concerns.