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Politically connected CEOs and earnings management: evidence from China

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  • Jing Chi
  • Jing Liao
  • Xiaojun Chen

Abstract

This paper examines the impact of politically connected CEOs on earnings management in Chinese listed firms. The results show that firms with politically connected CEOs engage in significantly lower levels of accrual-based earnings management than firms without politically connected CEOs. We then find evidence that firms with politically connected CEOs conduct significantly higher levels of real earnings management, which is more difficult to detect than accrual-based earnings management, and that in non-state-controlled firms, where government support is less, the presence of politically connected CEOs is positively related to accruals manipulation. We draw regulators’ attention to the fact that using accrual-based earnings management measures alone may underestimate the earnings management activities of firms with politically connected CEOs. Our findings are robust after controlling for possible endogeneity.

Suggested Citation

  • Jing Chi & Jing Liao & Xiaojun Chen, 2016. "Politically connected CEOs and earnings management: evidence from China," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 21(3), pages 397-417, July.
    • Handle: RePEc:taf:rjapxx:v:21:y:2016:i:3:p:397-417
    DOI: 10.1080/13547860.2016.1176644
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    Cited by:

    1. Chengpeng Zhu & Muhammad Husnain & Saif Ullah & Muhammad Tasnim Khan & Waris Ali, 2022. "Gender Diversity and Firms’ Sustainable Performance: Moderating Role of CEO Duality in Emerging Equity Market," Sustainability, MDPI, vol. 14(12), pages 1-26, June.
    2. Wang, Qing (Sophie) & Anderson, Hamish & Chi, Jing, 2018. "VC political connections and IPO earnings management," Emerging Markets Review, Elsevier, vol. 35(C), pages 148-163.
    3. Cailou Jiang & Rong Liu & Jie Han, 2023. "Does accountability audit of natural resource promote corporate environmental performance? An external supervision perspective," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(9), pages 9417-9438, September.
    4. Mohammad Abedalrahman Alhmood & Hasnah Shaari & Redhwan Al-dhamari, 2020. "CEO Characteristics and Real Earnings Management in Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 255-266, July.
    5. Zhi Wang & Geert Braam & Daniel Reimsbach & Jiaxin Wang, 2020. "Political embeddedness and firms’ choices of earnings management strategies in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4723-4755, December.
    6. repec:zbw:bofitp:2019_004 is not listed on IDEAS
    7. Ole‐Kristian Hope & Heng Yue & Qinlin Zhong, 2020. "China's Anti‐Corruption Campaign and Financial Reporting Quality†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 1015-1043, June.
    8. Brahma, Sanjukta & Zhang, Jing & Boateng, Agyenim & Nwafor, Chioma, 2023. "Political connection and M&A performance: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 372-389.
    9. Yuping Deng & Yanrui Wu & Helian Xu, 2020. "Political Connections and Firm Pollution Behaviour: An Empirical Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(4), pages 867-898, April.
    10. Muhammad Sadiq & Shafi Mohamad & Wing Chong Garrett Kwong, 2019. "Do CEO Incentives Mediate the Relationship between Political Influences and Financial Reporting Quality?," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 9(3), pages 276-284, March.

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