Abstract: Based on the R&D output data of manufacturing firms during the period of 2006-2009, by using LOGIT model, an empirical research involving the impact of institutional investors and mutual fund shareholders on company earning management through cutting R&D expenditure is conducted. The results show that as to companies with minor gains or losses, cutting R&D expenditure has become an important means of earning management, entire institutional investors and mutual fund shareholders in China are significantly negative correlated with earning management behavior of the companies. In addition, following conclusion is also empirically verified: when institutional investors hold higher proportion of shares, they could play an effective monitoring role in earning management behavior of both state-owned holding companies and non-state-owned holding companies; however when the proportion of holding shares is lower, their monitoring role to earning management behavior for state-owned holding companies is significantly lower than that for non-state-owned holding companies

Key words: R&D expenditure, institutional investor, earning management