Military managers and earnings management

Abstract

In a developing market, where the ownership is highly concentrated and the central governance issue is the conflict between majority and minority shareholders, how do managers with previous military experience (military managers) affect the quality of financial reporting? We use a sample of Chinese listed firms over period 2006–2016, with a total of 16,010 firm‐year observations. Our results suggest that firms with military managers are associated with higher levels of earnings management, through both accrual‐based and real‐activities manipulations. Those firms are more susceptible to financial restatements, qualified audit opinions, and penalties for violation. To alleviate endogeneity problems, we use both the instrumental variable regression and propensity score matching, and our results are robust. In addition, the effect of military managers is more pronounced in state‐owned firms and firms with weak internal control systems. These findings improve our understanding of the link between managerial traits and financial reporting decisions, in an environment where the major governance issue is the conflict between majority and minority shareholders.