Do State Enterprises Manage Earnings More than Privately Owned Firms? The Case of China

Abstract

This paper examines the impact of state ownership on earnings management. In contrast with the conventional belief that state ownership is the root of corporate inefficiency, we find lower levels of earnings management among state-owned enterprises than privately-owned firms in China even after controlling for the effect of tunneling. Further investigation suggests that the protection of state enterprises by the government might have played an important role in mitigating the pressure on managers to manipulate firm-specific information. Moreover, we find that the divergence in earnings quality between state-owned and privately-owned firms becomes less evident as the economy becomes more and more market driven.

Keywords: State Ownership, Earnings Management, Discretionary Accruals, Accruals Quality, Market Liberalization, China

JEL Classification: G30, G34, G15, M41