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The Impact of Corporate Governance on Informative Earnings Management in the Chinese Market
Author(s) -
Lin Zhijun,
Liu Ming,
Noronha Carlos
Publication year - 2016
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12084
Subject(s) - corporate governance , earnings management , business , accounting , accrual , earnings , proxy (statistics) , transparency (behavior) , finance , machine learning , computer science , political science , law
This study investigates the relationship between corporate governance and informative earnings management (IEM) for Chinese listed firms. While most previous studies on earnings management adopt the opportunistic perspective, we examine earnings management from the informative perspective, treating discretionary accruals as a means for managers to signal private information to external stakeholders regarding the firm's future cash flows or potential earnings. We hypothesize that good corporate governance practices motivate firm managers to engage in informative earnings management. By developing a measurable proxy of IEM, we test the association of managerial IEM with internal corporate governance mechanisms. The empirical results support our hypotheses, indicating that corporate governance has a positive impact on the possibility of managerial IEM, and better corporate governance should contribute to improving the transparency of financial reporting and the informativeness of reported earnings.