Abstract
The inherent problems of state-owned enterprises (SOEs), such as the lack of external monitoring, may harm their accounting quality. However, the results from prior research are not consistent. Therefore, this study investigates the effect of state ownership of SOEs on accounting quality, measured by earnings management. Using the samples of listed SOEs in the A-share market in China from 2009 to 2017, the results indicate that there is a significant and positive relationship between state ownership and earnings management. Furthermore, the results show that higher competition within the industry can effectively inhibit the negative effect of state ownership on accounting quality. Interestingly, the positive relationship between state ownership and earnings management has weakened in recent years, suggesting that the recent mixed-ownership reform of SOEs is effectively working. Collectively, current study extends prior research by focusing on SOEs in a planned economy and by combining the mixed-ownership reform with earnings management. Consequently, this study provides practical implication to regulatory bodies by showing that state ownership plays an important role in the accounting quality of SOEs.
Highlights
State-owned enterprises play a significant role in the global economy.From an international perspective, state-owned enterprises (SOEs) contribute to more than 10% of the global domestic products [1,2]
The following variables are controlled based on prior research [7,15,26,30,34]: natural logarithm of total assets (Size); total assets divided by total liabilities (LEV); operating cash flow divided by total assets (CF); lagged value of ROA, where ROA is the net income divided by the average assets (LagROA); variable equals one if a firm reports net losses and zero otherwise (Loss); lagged value of total accruals (LagAccrual); natural logarithm of a firm’s operating years since its foundation date (LnAge); sum of the ownership of top ten shareholders (Top10_Own); natural logarithm of the number of independent directors; difference between control rights and cash-flow rights of the controller (Wedge); ownership of foreign shareholders (Foreign_Own); and a variable equals one for the Big 4 audit firms and zero otherwise (Big4)
Variable definitions are as follows: StateOwnership = state ownership; DA = discretionary accruals; PMDA = performance-matched discretionary accruals; Competition = equals one when HHI is lower than the bottom quartile value and zero otherwise; Size = natural logarithm of total assets; leverage ratio (LEV) = total assets divided by total liabilities; CF = operating cash flow divided by total assets; LagROA = lagged value of ROA, where
Summary
State-owned enterprises (hereafter, SOEs) play a significant role in the global economy. One stream of research suggests that the accounting quality of SOEs is generally worse than that of other privately owned enterprises [4,5,6] These studies document a positive relationship between an increase in state ownership and the level of earnings management. Another stream of research suggests that SOEs controlled by state ownership are less engaged in earnings management and invest more in innovative projects [7] It seems that there are both positive and negative views regarding the role of state ownership in the accounting quality of SOEs. most results are from the developed market, which may differ under a planned economy.
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