Corporate governance, ownership structure and managing earnings to meet critical thresholds among Chinese listed firms

Abstract

This study investigates the behaviors of Chinese listed firms in using non-operating below-the-line items to manage earnings to meet rights-issuance threshold and to avoid delisting, and whether ownership structure and certain corporate governance mechanisms are related to such earnings management behaviors. The present empirical analyses document that the likelihood of managing earnings to meet these critical regulatory thresholds is negatively related to the adoption of independent directors in the board of directors and to the percentage shareholdings of the largest shareholders and positively related to the percentage share of state ownership in China. Further investigation documents that the relationship between earnings management and the fraction of independent directors in the board could be non-linear. There is little evidence, however, that board size, percentage shareholdings of CEO, the duality of CEO and top director of the board, the quality of external auditor, or foreign ownership is related to such earnings management measure. Using the distribution approach to detect earnings management, this study supplements the extant literature on the relationship between corporate governance, ownership structure and earnings management using traditional accrual-based measures. This study offers insights to policy makers, particularly those in emerging economies, about the inducement of earnings management behaviors by government regulations and the prescription to deter earnings management behaviors by encouraging certain internal corporate governance mechanisms.