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Does Social Trust Mitigate Earnings Management? Evidence from China

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  • Shihua Chen
  • Wanying Cai
  • Khalil Jebran

Abstract

We investigate whether social trust environment influences earnings management. Using a sample of Chinese firms during 2001–2016, we find strong evidence that social trust reduces earnings management. The results suggest that a high social trust environment enhances ethical managerial behavior and thereby reduce the likelihood of earnings management. Further, we find that the negative effect of social trust on earnings management is stronger for firms with weak legal environment and high media coverage. Our additional analysis also illustrates that social trust alleviates both accrual-based and real-activity earnings management. Our results remain valid to alternative measures of trust and earnings management and to a battery of robustness checks. Overall the findings demonstrate that social trust, as a social norm, influences corporate decisions.

Suggested Citation

  • Shihua Chen & Wanying Cai & Khalil Jebran, 2021. "Does Social Trust Mitigate Earnings Management? Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(10), pages 2995-3016, August.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:10:p:2995-3016
    DOI: 10.1080/1540496X.2019.1675046
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    Cited by:

    1. Katarina Valaskova & Peter Adamko & Katarina Frajtova Michalikova & Jaroslav Macek, 2021. "Quo Vadis, earnings management? Analysis of manipulation determinants in Central European environment," Oeconomia Copernicana, Institute of Economic Research, vol. 12(3), pages 631-669, September.
    2. Baoyin Qiu & Haohan Ren & Jingjing Zuo & Bo Cheng, 2023. "Social Trust and Female Board Representation: Evidence from China," Journal of Business Ethics, Springer, vol. 188(1), pages 187-204, November.
    3. Choi, Ahrum & Jia, Jingyi & Song, Byron Y. & Zhou, Gaoguang, 2024. "Cultural tightness and financial reporting behavior around the world," Journal of Business Research, Elsevier, vol. 178(C).
    4. Hu, Zhiying & Yang, Haiyan & Zhang, Yuyu, 2022. "Shared auditors, social trust, and relationship-specific investment in the supply chain," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    5. Zuo, Jingjing & Huang, Changqing & Qiu, Baoyin & Mai, Ruidong, 2023. "The construction of social credit system and corporate innovation: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    6. Ullah, Irfan & Jebran, Khalil & Umar, Muhammad & Bin Yousaf, Umair, 2023. "Chief executive officer trustworthiness and green innovation," Research in International Business and Finance, Elsevier, vol. 64(C).
    7. Kuo, Nan-Ting & Li, Shu & Jin, Zhen, 2023. "Social trust and the demand for audit quality," Research in International Business and Finance, Elsevier, vol. 65(C).

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