Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China |
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| Authors: | Agnes WY Lo Raymond MK Wong Michael Firth |
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| Institution: | 1. School of Accountancy, Massey University, Private Bag 102904, Auckland, New Zealand;2. Directorate General of Taxes, Ministry of Finance, Indonesia, Jl. Gatot Subroto Kav., 40-42, Jakarta Selatan, Jakarta 12190, Indonesia;1. School of Accountancy, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing, 100081, China;2. Gabelli School of Business, Fordham University, 113 West 60th Street, New York, NY, 10023, United States;1. Department of Finance, Corporate Governance Center, University of Tennessee, United States;2. Graduate Institute of Finance, National Chiao Tung University, 1001 Ta-Hsueh Rd., Hsinchu City, Taiwan 30010;1. College of Business and Administration, Zhejiang University of Technology, 18,Chaowang Road, Hangzhou, Zhejiang 310014, China;2. College of Business Administration and Center of International Studies, University of Missouri–St. Louis, One University Blvd, St. Louis, MO 63121, USA;3. School of Economics and Management, Southwest Jiaotong University, No. 111, Erhuanlu Beiyiduan, Chengdu, Sichuan 610031, China;4. Department of Finance, National Taiwan University, Taiwan;5. School of Economics and Management, Southwest Jiaotong University, No. 111, Erhuanlu Beiyiduan, PR China |
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| Abstract: | This study investigates whether good governance structures help constrain management's opportunistic behaviors (in the form of transfer pricing manipulations) in one of the world's most dynamic economies. Our data are a unique sample of 266 companies listed on the Shanghai stock exchange that disclose gross profit ratios on related-party transactions. We find that firms with a board that has a higher percentage of independent directors or a lower percentage of “parent” directors (i.e., directors who are representatives of the parent companies of the listed firms), or have different people occupying the chair and CEO positions, or have financial experts on their audit committees, are less likely to engage in transfer pricing manipulations. Overall, our research findings reveal that the quality of corporate governance is important in deterring the use of manipulated transfer prices in related-party sales transactions. |
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