The Agency Problem and the Moderating Role of Culturally-Based Management Style on Chinese Managers’ Discretionary Accruals

Posted: 4 Feb 2011 Last revised: 16 Jun 2011

See all articles by Cathy Beaudoin

Cathy Beaudoin

University of Vermont

Li Dang

California State Polytechnic University, San Luis Obispo

Qiaoling Fang

Ocean University of China

George T. Tsakumis

University of Delaware - Alfred Lerner College of Business and Economics

Date Written: February 4, 2011

Abstract

Upon completion of overseas acquisitions, Western firms typically hire Chinese locals or expatriates to run their Chinese operations. This is an important consideration because a Western executive’s managerial style may impact Chinese employee behavior differently than a Chinese executive’s managerial style. Utilizing an experiment with Chinese managers as participants, we examine the effect of the agency problem (when both an incentive and opportunity to act in line with one’s self-interest are present) on Chinese managers’ discretionary accrual decisions, as well as the role that their executives’ culturally-based management style (Eastern versus Western) plays in mitigating their propensity to manage earnings. We find that Chinese managers tend to override corporate concerns and recommend higher discretionary expense accruals in an effort to maximize their two-year bonus potential when the agency problem is present. Conversely, they tend to recommend lower discretionary expense accrual figures to help achieve corporate goals when the agency problem is not present. Interestingly, we also find that an executive’s culturally-based management style moderates the impact of the agency problem in that Chinese managers’ willingness to manage earnings across agency problem conditions is dampened more in the presence of an Eastern (Chinese) executive than in the presence of a Western (U.S.) executive.

Keywords: earnings management, culturally-based management style, China

JEL Classification: M40, M41

Suggested Citation

Beaudoin, Cathy and Dang, Li and Fang, Qiaoling and Tsakumis, George T., The Agency Problem and the Moderating Role of Culturally-Based Management Style on Chinese Managers’ Discretionary Accruals (February 4, 2011). Available at SSRN: https://ssrn.com/abstract=1755268

Cathy Beaudoin

University of Vermont ( email )

212 Kalkin Hall
Burlington, VT 05405-0158
United States

Li Dang

California State Polytechnic University, San Luis Obispo ( email )

San Luis Obispo, CA 93407
United States

Qiaoling Fang

Ocean University of China ( email )

5 Yushan Road
Qingdao, 266003
China

George T. Tsakumis (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

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