Earnings Management and Agency Costs: Evidence from China

Abstract

In this paper, we investigate the link between agency costs (AC) and earnings management (EM) using data of listed public companies in China from 1999 to 2014. We find a significant and positive relationship between AC and EM based on the static model that suggests opportunistic EM in China. However, we find an insignificant relationship between AC and EM when we use the dynamic model that takes into account the endogeneity issue. Therefore, our results provide further support to the growing literature on the concerns of endogeneity issues in corporate governance studies since failing to take these into account can lead to spurious results.

Keywords: agency costs, earnings management, dynamic model, endogeneity

JEL Classification: G32, G34