IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v71y2025i1p917-941.html
   My bibliography  Save this article

Earnings Management via Not-Wholly-Owned Subsidiaries

Author

Listed:
  • Mei Luo

    (School of Economics and Management, Tsinghua University, Beijing 100084, China)

  • Frank Zhang

    (School of Management, Yale University, New Haven, Connecticut 06520)

  • Xinyi Zhang

    (School of Business, Sun Yat-sen University, Guangzhou 510275, China)

Abstract

We investigate an unexplored mechanism of earnings management: income shifting from not-wholly-owned subsidiaries to help the parent company avoid losses at the expense of subsidiaries. Consolidated net income attributable to the parent company (i.e., net income) increases through this mechanism, as the parent company enjoys the full amount of the shifted earnings rather than sharing them with minority investors. We design an empirical model to directly estimate the amount of income shifted from subsidiaries to parent firms. Employing this measure, we find that firms opportunistically decrease earnings of their not-wholly-owned subsidiaries to manage net income upward to avoid losses. The results are stronger for firms with high noncontrolling ownership, firms with large subsidiaries, firms with strong influence over not-wholly-owned subsidiaries, and firms with a high level of related-party transactions. Our results are robust to alternative research designs, including controls for within-firm variations, alternative earnings thresholds, propensity score matching, and entropy balancing techniques. Our mechanism of earnings management is generalizable to other earnings management scenarios, such as share pledging.

Suggested Citation

  • Mei Luo & Frank Zhang & Xinyi Zhang, 2025. "Earnings Management via Not-Wholly-Owned Subsidiaries," Management Science, INFORMS, vol. 71(1), pages 917-941, January.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:1:p:917-941
    DOI: 10.1287/mnsc.2022.03090
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2022.03090
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2022.03090?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:71:y:2025:i:1:p:917-941. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.