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Top Management Compensation, Earnings Management And Default Risk: Insights From The Chinese Stock Market

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  • Wei Ting
  • Sin-Hui Yen
  • Sheng-Shih Huang

Abstract

China has sustained a rapid rate of economic growth and absorbed a great deal of foreign investment over the past decades. However, the laws pertaining to business in China have not kept up with China’s market growth. For this reason, investors in the Chinese stock market must assess associated risks. We set out in this study to examine the relationships that exist between default risk, earnings management, and top management compensation of publicly-listed companies in the Chinese stock market, which is now considered the most important emerging market. The results reveal a greater likelihood of default amongst larger discretionary accruals and lower top management compensation. In addition to studying the relationships which exist in the full sample, we also divide the sample into two sub-groups, based upon the signs of discretionary accruals, to investigate the likelihood of default. We find higher default potential amongst firms only falling into the category of positive discretionary accruals.

Suggested Citation

  • Wei Ting & Sin-Hui Yen & Sheng-Shih Huang, 2009. "Top Management Compensation, Earnings Management And Default Risk: Insights From The Chinese Stock Market," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 3(1), pages 31-46.
    • Handle: RePEc:ibf:ijbfre:v:3:y:2009:i:1:p:31-46
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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