Shareholder Protection,Ownership, and Dividends: Russian Evidence

This article investigates the relation between corporate governance mechanisms and dividend policy in Russian firms. Using a sample of Russian listed firms over the period 1998–2003, we estimate models for dividend pay probability and payout size. We find that there has been a significant increase in dividend payout levels which coincide with improvements in legal shareholder protection. State controlled firms are more frequent dividend payers as compared to other majority owned firms. We also find that dual share firms, in which corporate charters protect minority interests, have a higher dividend pay probability; while firms reporting according to US GAAP, which may be less likely to manipulate earnings, have a lower dividend payout.     

Ownership structure and real earnings management: Evidence from China

Although ownership structure is fundamental to corporate accounting behaviors, the current literature provides scarce evidence about the governance effect of ownership structure on real earnings management (REM). We seek to address this issue by using a sample of Chinese listed firms which are likely to engage in earnings management during 2003–2014. We find that Chinese firms with more influential largest shareholders are more prone to REM; and that firms with state control and managerial ownership are less likely to engage in REM. We further find that there exists a joint and sequential relationship between REM and accrual-based earnings management in China. Our findings are robust to different variable measurements, samples and regression models. Our study contributes to the research on the relationship between ownership structure and earnings management and contributes to the understanding of REM in emerging economies. Our findings have significant implications for shareholders, analysts and regulators, and are important and relevant given that MSCI decides to include China mainland stocks in its indexes starting 2018.     

Cross-listing and corporate malfeasance: Evidence from P-chip firms

The rapid growth of the private sector in China in recent decades has resulted in a large number of capital-hungry private sector firms. An increasing number of these firms choose to raise equity capital on international exchanges, which typically have stronger disclosure, corporate governance, and investor protection regulations. In light of international investors' and regulators' concerns about the corporate finance practice of China's private sector firms, particularly regarding the integrity of their reported earnings, we investigate whether these firms aggressively manipulate their accounts by examining those listed in Hong Kong, commonly known as P-chips. We find systematic evidence that P-chips engage in more earnings management and other corporate misbehaviors than their counterparts in Hong Kong. We posit and provide evidence consistent with cross-jurisdictional enforcement difficulty as a possible explanation for P-chips' questionable practices, and discuss its implications.     

Tunneling as an incentive for earnings management during the IPO process in China

Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999–2001, we show that related-party (RP) sales of goods and services could be used opportunistically to manage earnings upwards in the pre-IPO period. We also provide evidence that such behavior may be motivated by the prospect of tunneling opportunities in the post-IPO period, i.e., exploiting economic resources from minority shareholders for the benefit of the parent company. We provide evidence of one such opportunistic tunneling tool: non-repayment by Chinese parent companies of net outstanding corporate loans made to them by their newly listed subsidiaries. Furthermore, we provide evidence in support of our assertion of an association between such tunneling behavior in the post-IPO period and earnings management via abnormal RP sales in the pre-IPO period. Finally, we demonstrate the apparent failure of investors in Chinese IPOs to perceive the link between the two phenomena. The results enhance understanding of the motives for and consequences of earnings manipulation during the IPO process. They highlight a potential additional investment risk facing foreign investors in China’s capital markets as well as in Chinese firms cross-listed in non-Chinese stock exchanges, and have policy implications for China and other emerging markets which need to improve the protection of minority shareholders’ rights.     

The Real and Accrual-based Earnings Management Behaviors: Evidence from the Split Share Structure Reform in China

This paper investigates the earnings management activities in Chinese listed firms and the impact of the split share structure reform (SSSREF). We demonstrate that Chinese listed firms exhibited a long-term positive relationship between real and accrual-based earnings management activities over the 2002–2011 period. This reflects the environment of weak investor protection and lack of effective corporate governance in China. Our results also indicate that the SSSREF in China has not fundamentally improved firms' quality of financial information. This may be because ownership concentration remains high. However, it is of interest that the reform has created an incentive alignment effect exogenously. We find that firms' use of discretionary accruals was constrained, and they have consequently shifted to less detectable and under-scrutinized real earnings activities after the reform. This shift is similar to that seen with the direct regulatory changes in accounting reporting rules on firms' earnings behaviors in developed countries where the investor protection environment is strong. We suggest that firms' shifting between the accrual and real-based earnings methods is an overlooked area for investors to consider in the emerging market context, and may require the attention of regulators.     

Forecasts in IPO Prospectuses: The Effect of Corporate Governance on Earnings Management

Prior research suggests that managers may use earnings management to meet voluntary earnings forecasts. We document the extent of earnings management undertaken within Canadian Initial Public Offerings (IPOs) and study the extent to which companies with better corporate governance systems are less likely to use earnings management to achieve their earnings forecasts. In addition, we test other factors that differentiate forecasting from non‐forecasting firms, and assess the impact of forecasting and corporate governance on future cash flow prediction. We find that firms with better corporate governance are less likely to include a voluntary earnings forecast in their IPO prospectus. In addition, we find that while IPO firms use accruals management to meet forecasts; the informativeness of the discretionary accruals depends on whether or not the firm would have missed its forecast without the use of discretionary accruals.     

内部控制与异质机构持股的治理效应

本文实证检验了不同内部控制水平下,异质机构持股在抑制管理层盈余操纵方面的公司治理效应。研究发现,相比外地或短期机构持股,本地或长期机构持股更有助于提升应计质量和降低盈余噪音;当公司存在实质性内部控制缺陷时,本地或长期机构持股在抑制管理层盈余操纵方面的治理效应显著降低;相比国有控股,异质机构持股治理效应的发挥在非国有控股公司中受内部控制的影响更大;当公司存在财务报告实质性内控缺陷时,异质机构持股发挥的治理效应明显更弱。这些结果表明,异质机构持股治理效应的发挥离不开公司内部控制机制,二者之间是互补而非替代关系,这种互补关系主要由财务报告内部控制缺陷驱动。本研究有助于深化理解异质机构持股影响公司治理的具体作用机理,为实务界和监管机构改善公司治理、加强投资者保护提供经验参考。     

公司治理、机构投资者与盈余管理

本文选取沪深两市2003至2005年(非金融类)上市公司的数据,采用最小二乘法和二阶段回归方法,对公司治理、机构投资者与盈余管理三者的关系进行了实证研究。研究发现:机构投资者在一定程度上参与了上市公司的治理,其持股比例与公司治理水平呈正相关关系,说明机构投资者的持股比例越高越有助于提高公司治理水平;公司治理水平与盈余管理程度呈负相关关系;机构投资者的持股比例与盈余管理程度呈负相关关系,说明机构投资者能有效地抑制管理层的盈余管理行为。     

Reversing an impairment loss and earnings management: The role of corporate governance

This paper examines whether the reversal of a previously recognized impairment loss provides an opportunity for earnings management, and whether such behavior is associated with managers' incentives. It also examines whether a corporate-governance mechanism can mitigate this behavior. Since 2005, listed companies in Taiwan have been required to comply with accounting standards, equivalent to International Accounting Standards (IAS) No. 36 “Impairment of Assets,” which allow reversals of asset-impairment losses. Data on a sample of 55 firms that reversed impairment losses between 2005 and the first quarter of 2007 were matched by industry and size with 55 control firms. Empirical results show that firms recognizing more impairment losses are more likely to reverse impairment losses when doing so would avoid an earnings decline in a subsequent period, which is consistent with the “cookie jar” reserve hypothesis. We also show that such behavior is more pronounced for firms with higher debt ratios, consistent with earnings management being associated with the incentive to avoid violation of debt covenants. However, an effective corporate governance mechanism could mitigate such behavior. Our study may contribute to the debate on global convergence with IFRS, especially convergence between IFRS and U.S. GAAP with respect to the “Impairment of Assets,” by providing a rationale for the latter's prohibition of reversals. It may also contribute to the corporate-governance literature by showing the effect of governance mechanisms on deterring earnings management.     

Predictive versus opportunistic earnings management,executive compensation,and firm performance

We examine the association between earnings management and an important component of corporate governance, the incentives provided through compensation. We argue that firms with predictive (opportunistic) earnings management, in which discretionary accruals do (do not) relate to future cash flows, provide a more (less) ideal setting for the use of compensation as incentives. Our empirical tests show that CEO compensation levels (measured by salary, bonus, and other forms of compensation) are positively related to predictive earnings management and negatively related to opportunistic earnings management. We also find that predictive earnings management is positively associated with future returns, whereas opportunistic earnings management is negatively associated with future returns. Overall, our results suggest that firms provide more incentives if their earnings are also more informative because of discretionary accruals.     

Do heterogeneous oil price shocks really have different effects on earnings management?

Under the modern corporate governance structure, there is a knowledge gap in how companies' financial reporting practices respond to oil price shocks in China. To fill this gap, we employ China's A-share listed companies and follow Kilian (2009) study to investigate how the three types of classical oil shocks affect corporate earnings management heterogeneously. We also consider the role of oil implied volatility in this relationship and further examine the possible heterogeneity between energy-related and non-energy-related subsamples. The empirical results show that there are variant effects among the heterogeneous oil price shocks on earnings management. Specifically, oil supply shocks stimulate firms to manipulate more accrual and real earnings, and firms are more likely to carry out accrual earnings management downward. Oil aggregate demand shocks weaken the degree of accrual earnings manipulation and mainly reduce the negative accrual earnings manipulation. Oil-specific demand shocks constrain the earnings management behavior of companies and improve their accounting quality. Besides, the increased uncertainty of oil price weakens the promotion effect of oil supply shocks on earnings manipulation, and the moderating effect occurs mainly in downward earnings management. Furthermore, the subsample estimated results reveal that oil price shocks do not affect the degree of accrual earnings management of energy-related companies. Instead, they impact the non-energy-related companies. Overall, our findings provide a series of targeted policy recommendations to mitigate the principal-agent problems and cope with energy price volatility risks.     

The Impact of Corporate Governance Quality on Earnings Management: Evidence from European Companies Cross‐listed in the US

The study reported herein examines the impact of two central corporate governance mechanisms (internal audit function quality and board of directors’ quality) on the incidence of earnings management. Unlike most prior studies in the area, focused mainly on US firms, this study looks at European firms that are cross‐listed in the US and covers a long time span – before and after major changes were implemented in corporate governance policies (Sarbanes‐Oxley Act in the US and the 8th Company Law Directive in the European Union). Using novel and comprehensive measurement approaches for internal audit function quality and board of directors’ quality, we find that both mechanisms have a negative direct effect on the incidence of earnings management, while their interactive effect is positive. A longitudinal analysis of both mechanisms also reveals that internal audit function quality and the quality of boards of directors have increased significantly since the policy changes.     

Internal governance structures and earnings management

This paper investigates the role of a firm's internal governance structure in constraining earnings management. It is hypothesized that the practice of earnings management is systematically related to the strength of internal corporate governance mechanisms, including the board of directors, the audit committee, the internal audit function and the choice of external auditor. Based on a broad cross‐sectional sample of 434 listed Australian firms, for the financial year ending in 2000, a majority of non‐executive directors on the board and on the audit committee are found to be significantly associated with a lower likelihood of earnings management, as measured by the absolute level of discretionary accruals. The voluntary establishment of an internal audit function and the choice of auditor are not significantly related to a reduction in the level of discretionary accruals. Our additional analysis, using small increases in earnings as a measure of earnings management, also found a negative association between this measure and the existence of an audit committee.     

The effect of earnings management on firm performance: The moderating role of corporate governance quality

This paper investigates the relationship between earnings management and financial performance of firms in Anglophone sub-Saharan African Countries in a dynamic framework. The study shows how this relationship is moderated by aggregate disclosure and best-practice corporate governance quality metrics. The findings indicate that earnings management's performance effects persist even after controlling for dynamic endogeneity, simultaneity, and unobserved time-invariant heterogeneity inherent in the earnings management and performance relationship. Again, the results support the prediction of agency theory regarding the efficient monitoring effect of adherence to best-practice internal governance systems in constraining firms' earnings management practices and subsequently enhancing firms' performance. Moreover, the study's findings regarding the positive effect of earnings management on performance, which suggests efficiency motives behind earnings management practices in Africa, demonstrate that the African context is uniquely different from other emerging markets that report opportunistic motives. Concerning the moderating role, our study reveals that the positive effect of earnings management on the financial performance of firms tends to be stronger in the presence of corporate governance quality.     

Another victory of retail investors: Social media's monitoring role on firms' earnings management

Stock forums are expected to complement individual investors' sophistication via collective wisdom, thus triggering extreme market reactions through uniform scattered opinions. This paper investigates whether stock forums improve corporate governance and decrease earnings management among firms. We found that increased posts, views and comments in a stock forum raise firms' potential costs for obfuscating corporate performance and constrain their upward earnings management. Stock forum discussion tends to increase the likelihood of and the penalties for earnings management detection. By decomposing the cost of earnings management into tangible and regulatory costs, we find that the stock forum governance effect is more pronounced in firms with higher managerial ownership and higher regulatory risk. Social media is a complement and intensifier of traditional mass media. Firms with broader media coverage are more sensitive to the stock forum governance effect. Our results are robust after considering the likelihood that executives will account for stock forum discussion in their reporting decisions.     

Local creative culture and audit fees

This paper examines the association between local creative culture and audit fees. Using a large, unbalanced panel data of listed US firms between 2004 and 2018, we find evidence that firms headquartered in US counties with high creative culture tend to pay higher audit fees than firms headquartered in counties with low creative culture. We also find that such firms tend to have longer audit report lag and are subject to more shareholder litigation. Cross-sectional tests show that real earnings management, managerial risk-taking propensity, and external corporate governance environment moderate the positive association between creative culture and audit fees. The positive association between local creative culture and audit fees remains robust to controlling for endogeneity concerns. Our study contributes to the emerging literature on local creative culture by providing evidence that local creative culture encourages managers and employees to undertake risky initiatives, thereby increasing audit risks.     

公司治理水平、董事高管责任保险与盈余管理

董事高管责任保险在董事和高管遭受民事诉讼时具有“兜底”效应,降低了董事高管的执业风险.选取2002-2014年中国A股上市公司为样本,实证检验董事高管责任保险对公司盈余管理的影响,进一步分析在不同公司治理水平下,董事高管责任保险与公司盈余管理的关系是否存在差异.研究结果表明:董事高管责任保险的引入会加剧公司盈余管理行为;随着公司治理水平提高,董事高管责任保险与公司盈余管理的正相关关系减弱.     

The Covid-19 outbreak,corporate financial distress and earnings management

This study explores the association between the Covid-19 outbreak, corporate financial distress and earnings management practices in China. We investigate whether firms took advantage of the downturn in economic conditions during the pandemic to adjust their earnings using different earnings management techniques. Utilising a sample of 1832 listed firms and underlying theoretical frameworks (i.e., positive accounting and signalling theory), we find that firms were more inclined to manage earnings during the pandemic period. They favoured using the accrual-based rather than the real activity-based earnings management technique. We also find that firms engaged more in income-increasing practices in the shadow of the outbreak. In addition, our results further demonstrate that financially distressed firms were involved in earnings management, particularly accrual-based earnings management. However, compared to privately-owned firms, state-owned enterprises seem to be involved less in earnings management during the Covid-19 pandemic. Findings from this study raise some concerns for policymakers about the credibility of financial reporting information during Covid-19.     

Female tainted directors,financial reporting quality and audit fees

This paper examines the association between the presence of female tainted directors on corporate boards and audit committees and (1) financial reporting quality and (2) audit fees. Female tainted directors are defined as female directors who have been directors of the firms that have previously been involved in financial failures and integrity indiscretions. Using real earnings management and audit fees as proxies for effective governance and board reputation, we find that firms with female tainted directors have higher real earnings management and higher audit fees. However, since prior literature has demonstrated that audit fees are higher for firms with female directors because female directors demand better auditing, we corroborate a supply-side effect of auditors charging higher audit fees when female tainted directors exist. We demonstrate this by showing that while there is an association between audit fee and real earnings management, this association is higher for firms with female tainted directors. Arguably, the governance and reputational benefits of female directors on boards are negated if such directors have tarnished professional reputations.