Private vs State Ownership and Earnings Management: evidence from Chinese listed companies

Abstract

In this study, we investigate the role played by a firm's ownership structure in earnings management, with reference to the Chinese capital market. We measure the impacts of both ownership concentration and different ownership types, specifically the difference between the state as blockholder and private blockholders.Analysing 273 privately-owned and state-owned Chinese companies listed in 2002, we establish a link between ownership structure and firms' earnings management practices. Our results show that the relationship between earnings management measures and ownership concentration exhibits a statistically significant non-linear, inverted U-shape pattern known as the "entrenchment versus alignment" effect. It is clear that privately-owned listed companies tend to maximise their accounting earnings more. However, the entrenchment effect of ownership concentration on earnings management is weaker in privately-owned listed firms than in state-owned listed firms. Our study also confirms that when a firm manages its earnings, it tends to do so through both operating-related accrual mechanisms and nonoperating transactions with related parties.

State ownership effect on firms' FDI ownership decisions under institutional pressure: a study of Chinese outward-investing firms

“…An important feature of Chinese firms is state ownership (Chen & Young, 2010;Morck et al, 2008). While the role of state ownership in the domestic operation and governance of Chinese firms has been extensively researched (Ding, Zhang, & Zhang, 2007;Young, Peng, Ahlstrom, Bruton, & Jiang, 2008;Zou & Adams, 2008), limited attention has been paid to the role of state ownership in the internationalization of Chinese firms (Chen & Young, 2010). Our study addresses this research gap by revealing the role of state ownership in Chinese firms' FDI ownership decisions.…”

Empirical Research on Corporate Governance in China: A Review and New Directions for the Future

“…Further, the impact of state ownership on performance changes over time. For example, Carney et al (2009) With respect to expropriation, there is evidence that state ownership relates negatively to intercorporate loans (Jiang et al, 2010), earnings management (Cheng et al, 2010;Ding et al, 2007), and financial fraud (Yuan, Yuan, & Deng, 2008), suggesting that the state is less likely to engage in expropriation. However, there is evidence that state ownership relates positively to related-party resource transfers/transactions (Huyghebaert & Wang, 2012;Shan, 2013) and financial fraud (Firth, Rui, & Wu, 2011;Hou & Moore, 2010).…”

Do Ownership Structure Characteristics Affect Italian Private Companies’ Propensity to Engage in the Practices of “Earnings Minimization” and “Earnings Change Minimization”?

“…In addition, the majority of previous studies have investigated Chinese listed companies (Aharony, Lee, & Wong, 2000;Chen & Yuan, 2004;Ding, Zhang, & Zhang, 2007;Liu & Lu, 2007;Wang & Yung, 2011). Ding et al (2007) and Wang and Yung (2011) have found that state-owned companies manage earnings less than privately-owned companies. Conversely, Aharony et al (2000), Chen and Yuan (2004) and Liu and Lu (2007) have found that state-owned companies manage earnings more than privately-owned ones do.…”

“…As in previous studies (e.g. Demsetz & Lehn, 1985;Prowse, 1992;Claessens & Djankcov, 1999;Ding et al, 2007), it is defined as the proportion of shares held by the majority shareholder.…”