Earnings Management to Tunnel: Evidence from China's Listed Companies

46 Pages Posted: 30 Apr 2004

See all articles by Qiao Liu

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Joe Zhou Lu

The University of Hong Kong - School of Business

Date Written: August 2003

Abstract

This paper hypothesizes that earnings management in China's listed companies is mainly induced by controlling owners' tunneling activity. We conduct our analyses in two stages. In the first stage, we relate our analyses to prior research on Chinese listed companies which has documented their strong incentives to manage earnings in order to meet certain return on equity (ROE) thresholds. We identify tunneling evidence in two scenarios where such practice has been most conspicuous. In the second stage, we examine systematic differences in earnings management across the universe of China's listed companies during 1999-2001. We provide cross-sectional and time-series evidence showing that firms with higher corporate governance levels tend to have less earnings management. Our empirical findings although not being able to completely exclude other theories, strongly suggest that agency conflicts between controlling shareholders and outside investors are the main stimuli of earnings management in China's listed companies.

Note: Previously titled "Earnings Management to Tunnel: Evidence from Chinese Listed Companies"

Keywords: earnings management, tunneling, corporate governance, Chinese listed companies

JEL Classification: G34, G32, M41, M43

Suggested Citation

Liu, Qiao and Lu, Joe Zhou, Earnings Management to Tunnel: Evidence from China's Listed Companies (August 2003). Available at SSRN: https://ssrn.com/abstract=349880 or http://dx.doi.org/10.2139/ssrn.349880

Qiao Liu (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Joe Zhou Lu

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

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