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Private vs State Ownership and Earnings Management: evidence from Chinese listed companies

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  • Yuan Ding
  • Hua Zhang
  • Junxi Zhang

Abstract

In this study, we investigate the role played by a firm’s ownership structure in earnings management, with reference to the Chinese capital market. We measure the impacts of both ownership concentration and different ownership types, specifically the difference between the state as blockholder and private blockholders. Analysing 273 privately‐owned and state‐owned Chinese companies listed in 2002, we establish a link between ownership structure and firms’ earnings management practices. Our results show that the relationship between earnings management measures and ownership concentration exhibits a statistically significant non‐linear, inverted U‐shape pattern known as the “entrenchment versus alignment” effect. It is clear that privately‐owned listed companies tend to maximise their accounting earnings more. However, the entrenchment effect of ownership concentration on earnings management is weaker in privately‐owned listed firms than in state‐owned listed firms. Our study also confirms that when a firm manages its earnings, it tends to do so through both operating‐related accrual mechanisms and non‐operating transactions with related parties.

Suggested Citation

  • Yuan Ding & Hua Zhang & Junxi Zhang, 2007. "Private vs State Ownership and Earnings Management: evidence from Chinese listed companies," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(2), pages 223-238, March.
    • Handle: RePEc:bla:corgov:v:15:y:2007:i:2:p:223-238
    DOI: 10.1111/j.1467-8683.2007.00556.x
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    1. Lihui Tian, 2001. "Government Shareholding and the Value of China's Modern Firms," William Davidson Institute Working Papers Series 395, William Davidson Institute at the University of Michigan.
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