Multiple large shareholders, earnings management, and operating risk: Empirical evidence from China

Maonan Chen, Yujun Ye

Article ID: 3955
Vol 8, Issue 5, 2024

VIEWS - 1465 (Abstract)

Abstract


This study uses the annual financial data of Chinese A-share listed firms from 2010 to 2020 to investigate the relationship between multiple large shareholders (MLS) and earnings management (EM). After analyzing the samples using the Ordinary Least Squares (OLS) model and endogenous switching regression (ESR) model, the empirical results show that the presence of MLS can increase corporate EM activities and the MLS have a significantly positive effect on EM in both the treatment and control groups. In addition, this conclusion still holds after conducting multiple robustness tests. The cross-section analysis shows that the external audit supervision quality, institutional shareholders, and the uncertainty of the external economic environment have significant impacts on the baseline model results. Lastly, mediation effect analysis shows that the presence of MLS increases the corporate operating risk through EM activities. The conclusions of this paper are critical for policymakers to supervise China’s capital market, improve the level of corporate governance of China’s listed firms, and further promote reform of ownership structure.


Keywords


multiple large shareholders; earnings management; operating risk; corporate governance; mediation effect analysis

Full Text:

PDF


References

  1. Acharya, V. V., Amihud, Y., & Litov, L. (2011). Creditor rights and corporate risk-taking. Journal of Financial Economics, 102(1), 150–166. https://doi.org/10.1016/j.jfineco.2011.04.001
  2. Adelopo, I., Jallow, K., & Scott, P. (2012). Multiple large ownership structure, audit committee activity and audit fees. Journal of Applied Accounting Research, 13(2), 100–121. https://doi.org/10.1108/09675421211254821
  3. Ahearne, M. J., Boichuk, J. P., Chapman, C. J., et al. (2016). Real Earnings Management in Sales. Journal of Accounting Research, 54(5), 1233–1266. https://doi.org/10.1111/1475-679x.12134
  4. Appel, I. R., Gormley, T. A., & Keim, D. B. (2016). Passive investors, not passive owners. Journal of Financial Economics, 121(1), 111–141. https://doi.org/10.1016/j.jfineco.2016.03.003
  5. Attig, N., El Ghoul, S., & Guedhami, O. (2009). Do multiple large shareholders play a corporate governance role? Evidence from east Asia. Journal of Financial Research, 32(4), 395–422. https://doi.org/10.1111/j.1475-6803.2009.01255.x
  6. Attig, N., Guedhami, O., & Mishra, D. (2008). Multiple large shareholders, control contests, and implied cost of equity. Journal of Corporate Finance, 14(5), 721–737. https://doi.org/10.1016/j.jcorpfin.2008.08.008
  7. Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
  8. Bansal, M., Kumar, A., Bhattacharyya, A., et al. (2023). Predictors of revenue shifting and expense shifting: Evidence from an emerging economy. Journal of Contemporary Accounting & Economics, 19(1), 100339. https://doi.org/10.1016/j.jcae.2022.100339
  9. Ben-Nasr, H., Boubaker, S., & Rouatbi, W. (2015). Ownership structure, control contestability, and corporate debt maturity. Journal of Corporate Finance, 35, 265–285. https://doi.org/10.1016/j.jcorpfin.2015.10.001
  10. Bennedsen, M., Wolfenzon, D. (2000). The balance of power in closely held corporations. Journal of Financial Economics 58(1), 113-139. https://doi.org/10.1016/S0304-405X(00)00068-4
  11. Bens, D. A., Nagar, V., & Wong, M. H. F. (2002). Real Investment Implications of Employee Stock Option Exercises. Journal of Accounting Research, 40(2), 359–393. https://doi.org/10.1111/1475-679x.00052
  12. Bereskin, F. L., Hsu, P., & Rotenberg, W. (2018). The Real Effects of Real Earnings Management: Evidence from Innovation. Contemporary Accounting Research, 35(1), 525–557. https://doi.org/10.1111/1911-3846.12376
  13. Bloch, F., & Hege, U. (2003). Multiple Shareholders and Control Contests. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2273211
  14. Bloom, N., Bond, S., & Van Reenen, J. (2007). Uncertainty and Investment Dynamics. Review of Economic Studies, 74(2), 391–415. https://doi.org/10.1111/j.1467-937x.2007.00426.x
  15. Boateng, A., & Huang, W. (2016). Multiple Large Shareholders, Excess Leverage and Tunneling: Evidence from an Emerging Market. Corporate Governance: An International Review, 25(1), 58–74. https://doi.org/10.1111/corg.12184
  16. Cao, F., Peng, S., & Ye, K. (2019). Multiple large shareholders and corporate social responsibility reporting. Emerging Markets Review, 38, 287–309. https://doi.org/10.1016/j.ememar.2019.02.004
  17. Chakraborty, I., & Gantchev, N. (2013). Does shareholder coordination matter? Evidence from private placements. Journal of Financial Economics, 108(1), 213–230. https://doi.org/10.1016/j.jfineco.2012.10.001
  18. Chen, F., Hope, O., Li, Q., et al. (2018). Flight to Quality in International Markets: Investors’ Demand for Financial Reporting Quality during Political Uncertainty Events. Contemporary Accounting Research, 35(1), 117–155. https://doi.org/10.1111/1911-3846.12355
  19. Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19. https://doi.org/10.1016/j.jacceco.2010.01.002
  20. Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods. The Accounting Review, 83(3), 757–787. https://doi.org/10.2308/accr.2008.83.3.757
  21. Dechow, P. M., Sloan, R. G., Sweeney, A. P. (1995). Detecting Earnings Management. The Accounting Review, 70(2), 193-225.
  22. Dhaliwal, D., Wang, S. (1992). The effect of book income adjustment in the 1986 alternative minimum tax on corporate financial reporting. Journal of Accounting and Economics, 15(1), 7-26. https://doi.org/10.1016/0165-4101(92)90010-Y
  23. Eckbo, B. E., Masulis, R. W. (1992). Adverse selection and the rights offer paradox. Journal of Financial Economics, 32(3), 293-332. https://doi.org/10.1016/0304-405X(92)90030-2
  24. Edmans, A., & Manso, G. (2010). Governance Through Trading and Intervention: A Theory of Multiple Blockholders. Review of Financial Studies, 24(7), 2395–2428. https://doi.org/10.1093/rfs/hhq145
  25. Fan, J. P. H., & Wong, T. J. (2004). Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia. Journal of Accounting Research, 43(1), 35–72. https://doi.org/10.1111/j.1475-679x.2004.00162.x
  26. Fang, Y., Hu, M., & Yang, Q. (2018). Do executives benefit from shareholder disputes? Evidence from multiple large shareholders in Chinese listed firms. Journal of Corporate Finance, 51, 275–315. https://doi.org/10.1016/j.jcorpfin.2018.06.008
  27. Ge, W., & Kim, J. B. (2014). Real earnings management and the cost of new corporate bonds. Journal of Business Research, 67(4), 641–647. https://doi.org/10.1016/j.jbusres.2013.01.021
  28. Gomes, A. R., & Novaes, W. (2001). Sharing of Control as a Corporate Governance Mechanism. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.277111
  29. Gunny, K. A. (2010). The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks. Contemporary Accounting Research, 27(3), 855–888. https://doi.org/10.1111/j.1911-3846.2010.01029.x
  30. Healy, P. M., & Wahlen, J. M. (1999). A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizons, 13(4), 365–383. https://doi.org/10.2308/acch.1999.13.4.365
  31. Hu, X., & Schiantarelli, F. (1998). Investment and Capital Market Imperfections: A Switching Regression Approach Using U.S. Firm Panel Data. Review of Economics and Statistics, 80(3), 466–479. https://doi.org/10.1162/003465398557564
  32. Jiang, F., Cai, W., Wang, X., et al. (2018). Multiple large shareholders and corporate investment: Evidence from China. Journal of Corporate Finance, 50, 66–83. https://doi.org/10.1016/j.jcorpfin.2018.02.001
  33. Jiang, F., Ma, Y., & Wang, X. (2020). Multiple blockholders and earnings management. Journal of Corporate Finance, 64, 101689. https://doi.org/10.1016/j.jcorpfin.2020.101689
  34. Kim, J. B., & Sohn, B. C. (2013). Real earnings management and cost of capital. Journal of Accounting and Public Policy, 32(6), 518–543. https://doi.org/10.1016/j.jaccpubpol.2013.08.002
  35. Laeven, L., & Levine, R. (2007). Complex Ownership Structures and Corporate Valuations. Review of Financial Studies, 21(2), 579–604. https://doi.org/10.1093/rfs/hhm068
  36. Lin, C., Ma, Y., Malatesta, P., et al. (2013). Corporate ownership structure and the choice between bank debt and public debt. Journal of Financial Economics, 109(2), 517–534. https://doi.org/10.1016/j.jfineco.2013.03.006
  37. Lin, T. J., Tsai, H. F., Imamah, N., et al. (2016). Does the identity of multiple large shareholders affect the value of excess cash? Evidence from China. Pacific-Basin Finance Journal, 40, 173–190. https://doi.org/10.1016/j.pacfin.2016.10.007
  38. Lokshin, M., & Sajaia, Z. (2004). Maximum Likelihood Estimation of Endogenous Switching Regression Models. The Stata Journal: Promoting Communications on Statistics and Stata, 4(3), 282–289. https://doi.org/10.1177/1536867x0400400306
  39. Lokshin, M., & Sajaia, Z. (2011). Impact of Interventions on Discrete Outcomes: Maximum Likelihood Estimation of the Binary Choice Models with Binary Endogenous Regressors. The Stata Journal: Promoting Communications on Statistics and Stata, 11(3), 368–385. https://doi.org/10.1177/1536867x1101100303
  40. Maddala, G. S. (1983). Limited-dependent and qualitative variables in econometrics. https://doi.org/10.1017/cbo9780511810176
  41. Maury, B., & Pajuste, A. (2005). Multiple large shareholders and firm value. Journal of Banking & Finance, 29(7), 1813–1834. https://doi.org/10.1016/j.jbankfin.2004.07.002
  42. McGuire, S. T., Wang, D., & Wilson, R. J. (2014). Dual Class Ownership and Tax Avoidance. The Accounting Review, 89(4), 1487–1516. https://doi.org/10.2308/accr-50718
  43. Mo, Z. (2021). Multiple Large Shareholders and Corporate Innovation:Evidence from Chinese Listed Company.World Scientific Research Journal, 7(5), 345-355. https://doi.org/10.6911/WSRJ.202105_7(5).0037
  44. Ouyang, C., Xiong, J., & Huang, K. (2020). Do multiple large shareholders affect tax avoidance? Evidence from China. International Review of Economics & Finance, 67, 207–224. https://doi.org/10.1016/j.iref.2019.12.009
  45. Pagano, M., & Roell, A. (1998). The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public. The Quarterly Journal of Economics, 113(1), 187–225. https://doi.org/10.1162/003355398555568
  46. Richardson, G., Wang, B., & Zhang, X. (2016). Ownership structure and corporate tax avoidance: Evidence from publicly listed private firms in China. Journal of Contemporary Accounting & Economics, 12(2), 141–158. https://doi.org/10.1016/j.jcae.2016.06.003
  47. Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370. https://doi.org/10.1016/j.jacceco.2006.01.002
  48. Shleifer, A., & Vishny, R. W. (1997). A Survey of Corporate Governance. The Journal of Finance, 52(2), 737–783. Portico. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
  49. Trueman, B., & Titman, S. (1988). An Explanation for Accounting Income Smoothing. Journal of Accounting Research, 26, 127. https://doi.org/10.2307/2491184
  50. Volpin, P. F. (2002). Governance with poor investor protection: evidence from top executive turnover in Italy. Journal of Financial Economics, 64(1), 61-90. https://doi.org/10.1016/S0304-405X(02)00071-5
  51. Vorst, P. (2015). Real Earnings Management and Long-Term Operating Performance: The Role of Reversals in Discretionary Investment Cuts. The Accounting Review, 91(4), 1219–1256. https://doi.org/10.2308/accr-51281
  52. Wang, W., Liang, S., Yu, R., et al. (2022). Theoretical Evidence for Green Innovation Driven by Multiple Major Shareholders: Empirical Evidence from Chinese Listed Companies. Sustainability, 14(8), 4736. https://doi.org/10.3390/su14084736
  53. Zhang, M., M, L., Zhang, B., et al. (2016). Pyramidal structure, political intervention and firms’ tax burden: Evidence from China’s local SOEs. Journal of Corporate Finance, 36, 15–25. https://doi.org/10.1016/j.jcorpfin.2015.10.004
  54. Zhao, Y., Chen, K. H., Zhang, Y., et al. (2012). Takeover protection and managerial myopia: Evidence from real earnings management. Journal of Accounting and Public Policy, 31(1), 109–135. https://doi.org/10.1016/j.jaccpubpol.2011.08.004
  55. Zouari, A., Rebaï, I. (2009). Institutional ownership differences and earnings management: A neural networks approach. International Research Journal of Finance and Economics, 34, 172-184.


DOI: https://doi.org/10.24294/jipd.v8i5.3955

Refbacks

  • There are currently no refbacks.


Copyright (c) 2024 Maonan Chen, Yujun Ye

License URL: https://creativecommons.org/licenses/by/4.0/

This site is licensed under a Creative Commons Attribution 4.0 International License.