Corporate Governance And Earnings Management From The Perspective Of The Ultimate Controlling Shareholders

Earnings management is an important issue since it is closely related with investor protection and accounting standard setting.Corporate governance mechanism is regarded as a method of restraining earnings management.And ownership structure has significant effect on corporate governance.La Porta,Lopez-de-Silanes and Shleifer identified the existence of ultimate controlling shareholders through tracing the control chain.Many studies indicate that most companies are controlled by the controlling shareholder.The ultimate controlling owners typically have power over firms significantly in excess of their cash flow rights,primarily through the use of pyramids,cross-shareholding and so on.It's difficult for the outside shareholder to find what the ultimate owner wants to do for the complex ownership structure.The agency problem between the ultimate owner and the outside owner is even worse.Our research examines the effect of the character of ownership structure,especially the divergence of cash flow rights and voting rights,on earnings management from the perspective of the ultimate controlling shareholders.It will be a useful complement to the research of direct ownership structure on earnings management.In order to making an intensive study on the issues of corporate governance and earnings management from the perspective of the ultimate controlling shareholders, this article choose non-financial listed companies' datum from 2004 to 2007,which are obtained by Shanghai and Shenzhen Stock Exchange.On the basis of adjusted-Jones model,this paper calculates the companies' discretionary accruals as the indication of their earnings management.Our major conclusions through the empirical analysis are as following:(1)in general,ultimate control of cash flow,control right and earnings management degree show the proportion of U-shape relationship.However,the different nature of the ultimate controlling shareholders has different impacts on the earnings management.(2)State-owned company has more motivation of earnings management under the divergence of cash flow rights and voting rights.(3)Independent directors have no positive effect to restrict earnings management under the control of non-state owned controller.When one person play the role of CEO and manager,state-owned controller have more earnings management.(4)The high leverage will bring greater earnings management,especially when the Ultimate Controlling Shareholders are non-state owned controller.