Earnings management of state-owned enterprises as a target: Evidence from China

Abstract

We investigate earnings management of state-owned enterprises (SOEs) being a block trade target in China. Some block trades transfer control rights of SOEs to private parties (STP transactions) while others sell shares to another SOE (STS transactions). We find that SOEs manage earnings more upward in STP transactions than in STS transactions. Meanwhile, we find no evidence that SOEs charge higher prices when in STP than in STS. These results are consistent with the idea that target firms engage in earnings management especially when there is serious information asymmetry between bidders and targets.

Keywords: Earnings management; Discretionary accruals; Target companies; Block trade; China

JEL Classification: G34; G38