Abstract: Identifying the governance role of large institutional investors plays an important role in the governance role of listed companies and the stability of the capital market. The existing researches paid less attention to the large institutional investors in China. Based on the data from A-share listed companies from 2004 to 2023, this paper examines the impact of large institutional investors on corporate earnings management. The findings reveal that large institutional investors in China's capital market exacerbate corporate earnings management, exhibiting a“granularity”effect and generating a “granularity phenomenon”. The channeling effect test results indicate that large institutional investors facilitate earnings management among the key holding companies and the non-key holding companies within the key holding industries by leading the establishment of“collusive alliances”among portfolio firms. This exacerbates information asymmetry within investment industries, thickens information barriers, distorts investment decisions of non-key holding companies in key holding industries, and helps key holding companies become industry leaders, thereby maximizing portfolio value. In contrast, a group of smaller independent institutions with a scale comparable to that of large institutional investors mitigates corporate earnings management through pre-investment selection and post-investment “exit threat”deterrence supervision. Based on the above findings, the regulators should strengthen oversight of large institutional investors to prevent“collusive alliances”and the“granularity effect”brought by large investors. Meanwhile, policymakers should reserve sufficient room for survival and development for smaller independent institutions when formulating policies, enabling them to counterbalance corporate controlling shareholders, management, and large institutional investors.

Key words: large institutional investor, collusion alliance, information barrier, exit threat, earnings management