Earnings Management of Chinese Central State-Owned Enterprises - The Alignment Effects and State-Level Incentives

Abstract

This study empirically investigates the earnings management of Chinese central state-owned enterprises (SOEs). The Chinese central SOEs are closely and controlled by the central government, well-funded, super-sized national champion conglomerates that monopolize the key strategic industries domestically and compete aggressively overseas. Consistent with the predictions of the Alignment Effects that high-level state ownership reduces SOEs’ firm level incentives for earnings management we find that the central SOEs involve in less earnings management than non-SOEs in general. However, we argue and find evidence that high-level alignment of the interests of the controlling state owner and creates new state-level earnings management incentives for the Chinese central SOEs. Specifically, we find that central SOEs engage in more earnings increasing (decreasing) management during extreme low (high) GDP growth years. Such earnings management activities help to lessen the appearance of economic volatility which is unconducive to state political and social stability. This study contributes to the SOE earnings management literature by exploring the state-level earnings management incentives induced by the alignment effects, as well as the traditional firm-level incentives suppressed by the alignment effects. To our knowledge the state-level earnings management incentives has never been examined the in SOE earnings management literature. This study provides a new perspective for future studies on SOEs financing reporting behaviour.