The Impact of the Corporate Governance Code on Earnings Management – Evidence from Chinese Listed Companies

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AbstractThis study investigates the impact of the 2002 Chinese Code of Corporate Governance for Listed Companies on earnings manipulations. We find that, in general, the 2002 CODE had a positive effect on curbing earnings management through the introduction of independent non‐executive directors to the board of directors and the audit committee, and accounting/financial experts to the audit committee. Although such an impact was minimal when the firms were state‐controlled, it became significant once they were privately controlled. Overall, we find regulatory reform on corporate governance plays an important role in deterring the use of earnings management.