Real earnings management, corporate governance and stock price crash risk: evidence from China

Abstract

PurposeThe aim of this paper is to provide additional insights on the association between real earnings management (REM) and crash risk, particularly from the perspective of an emerging market economy. It also examines the moderation role that internal and external corporate governance may play in this area.Design/methodology/approachRelying on archival data from the RESSET and CSMAR databases over a timeframe from 2010 to 2018 of China listed company, the authors test the hypotheses by regressing common measures of crash risk on the treatment variable (REM) and crash risk control variables identified in the prior crash risk literature. The authors also introduce monitoring proxies (internal controls as an internal governance and institutional ownership as an external governance) and assess how effective internal and external governance moderate the relation between REM and stock price crash risk.FindingsThe results suggest firms with higher REM have a significantly greater stock price crash risk, and that this association is mitigated by external monitoring. That is, greater institutional ownership, particularly pressure insensitive owners, mitigates the impact of REM on stock price crash risk. However, internal control does not mitigate the association between REM and stock price crash risk.Originality/valueFollowing the passage of the Sarbanes–Oxley (SOX) Act, prior research has documented an increase in the use of REM and a positive association between REM and cash risk. The authors demonstrate that they persist in one of the largest emerging markets where institutional regulations, market conditions and corporate behaviors are different from those in developed markets. Also, the assessment of the moderation effect of internal and external governance mechanisms could have meaningful implications for investors and regulators in Chinese and other emerging markets.

Insider ownership and default risk: What does the data reveal about Japanese firms?

“…Prior studies provide evidence that institutional shareholders can significantly affect firms' default risk (Li, Kannan, Rau, & Yang, 2022;Kabir et al, 2020). As per the "management disciplining" hypothesis, institutional shareholders actively monitor managers to discourage (Lima & Hossain, 2018).…”

“…Prior studies provide evidence that institutional shareholders can significantly affect firms’ default risk (Li, Kannan, Rau, & Yang, 2022; Kabir et al. , 2020).…”

تأثیر جودة المعلومات المحاسبیة على العلاقة بین میول المستثمرین وخطر انهیار أسعار الأسهم: أدلة من الشركات المقیدة بالبورصة المصریة

“…‫ب‬ ‫عمعته‬ ‫س‬ ‫عى‬ ‫،ا‬ ‫عا‬ ‫الحد‬ ‫و‬ ‫ب‬ ‫و‬ ‫ب‬ ‫ع‬ ‫ع‬ ‫التقاف‬ ‫عر‬ ‫ع‬ ‫لدط‬ ‫عه‬ ‫ع‬ ‫عرف‬ ‫ع‬ ‫ع‬ ‫قاي‬ ‫و‬ ‫عر‬ ‫ع‬ ‫أخ‬ ‫عة‬ ‫ع‬ ‫ناحي‬ ‫عن‬ ‫ع‬ ‫م‬ ‫عاع‬ ‫ع‬ ‫ي‬ ‫ارور‬ ‫اامعر‬ ‫عا‬ ‫ع‬ ‫إن‬ (Ball, 2009;Skinner, 1994) ‫عة‬ ‫ع‬ ‫النقط‬ ‫عى‬ ‫ع‬ ‫إل‬ ‫عولها‬ ‫ع‬ ‫وول‬ ‫عيمة‬ ‫ع‬ ‫الس‬ ‫عار‬ ‫ع‬ ‫اسخب‬ ‫ع‬ ‫ع‬ ‫ا‬ ‫اا‬ ‫عر‬ ‫ع‬ ‫عس‬ ‫ع‬ ‫م‬ ‫عن‬ ‫ع‬ ‫ولن‬ ‫ب‬ -‫عول‬ ‫ع‬ ‫التح‬ ‫عة‬ ‫ع‬ ‫نقط‬ Tipping Point -‫عر‬ ‫اسم‬ ‫عدتب‬ ‫اح‬ ‫و‬ ‫عة‬ ‫افع‬ ‫عوم‬ ‫الس‬ ‫عى‬ ‫إل‬ ‫الدروج‬ ‫ف‬ ‫اسخبار‬ ‫هذ‬ ‫عدأ‬ ‫بهاب‬ ‫اطحتدا‬ ‫المديروض‬ ‫معها‬ ‫ستطيس‬ ‫ط‬ ‫الت‬ ‫أس‬ ‫ل‬ ‫ت‬ ‫عر‬ ‫ز‬ ‫الذي‬ ‫عار‬ ‫اطنهي‬ ‫لدطر‬ ‫اسسه‬ ‫عار‬ (Hutton et al, 2009;Jin & Myers, 2006) ‫عر‬ ‫عتع‬ ‫ز‬ ‫وي‬ ‫ب‬ ‫عاع‬ ‫إ‬ ‫اسر‬ ‫ت‬ ‫راار‬ ‫و‬ ‫عة‬ ‫المالي‬ ‫ير‬ ‫عار‬ ‫التق‬ ‫عول‬ ‫م‬ (Bleck & Liu, 2007;Francis et al, 2016;C. Kim et al, 2019;Kim & Zhang, 2014;Li et al, 2022;Zhu, 2016) ‫عد‬ ‫التعس‬ ‫يع‬ ‫عر‬ ‫ال‬ ‫عب‬ ‫التعن‬ ‫و‬ ‫ب‬ (Garg et al, 2022;Hamza & Zaatir, 2021;Kim et al, 2011) ‫سنه‬ ‫ولير‬ ‫التنديذيين‬ ‫ين‬ ‫لامدير‬ ‫امدت‬ ‫الا‬ ‫الثقة‬ ‫و‬ ‫ب‬ (Andreou et al, 2017;Lee et al, 2019;Liang et al, 2020) ‫عة‬ ‫الداخاي‬ ‫عة‬ ‫الرقاإل‬ ‫عة‬ ‫إللنلم‬ ‫عوهري‬ ‫الع‬ ‫عع‬ ‫ال‬ ‫و‬ ‫ب‬ (J. Hong & Lee, 2015; J.…”

“…(Cornell et al, 2017;Firth et al, 2015;Hutton et al, 2009;Kim & Zhang, 2014;Yin & Tian, 2017 Chebbi, 2022;Callen & Fang, 2015a, 2015bChen et al, 2001;Cui & Zhang, 2020;Dang et al, 2018;Fan et al, 2021;Fu et al, 2021;Yin & Tian, 2017 (Cui & Zhang, 2020;Fan et al, 2021;Firth et al, 2015;Fu et al, 2021;Wen et Chebbi, 2022;Cui & Zhang, 2020;Fan et al, 2021;Fu et al, 2021;Wu et al, 2021;Yin & Tian, 2017 & Liu, 2007;Callen & Fang, 2015a, 2015bDeFond et al, 2015;Francis et al, 2016;Hutton et al, 2009;C. Kim et al, 2019;Kim & Zhang, 2014Li et al, 2022) . (Baltagi, 2005;Greene, 2003;Labra & Torrecillas, 2018;Singh et al, 2017;Ullah et Ai, X., Cunningham, L. M., Li, X., & Myers, L. A.…”

The Dynamic Endogeneity Issue between Corporate Ownership Structure and Real-Based Earnings Manipulation in an Emerging Market: Advanced Dynamic Panel Model

“…As a central player in the Middle East region, Egypt is unique compared to common law countries such as the US and the UK, with a civil law system that is characterized by ineffective and inadequate regulatory systems, noncompliance with disclosure requirements of the Egyptian accounting standards, high conformity of accounting earnings to taxable income, and a lack of control and monitoring mechanisms to check compliance with accounting standards (Samaha and Dahawy 2010;Samaha et al 2012). Despite the passage of the Sarbanes-Oxley (SOX) Act, earnings manipulation practices persist in emerging markets, including Egypt, where institutional settings, corporate behavior, and market conditions differ from developed countries (Li et al 2022;Attia et al 2022).…”