Empirical Research On The Relationship Between Large Shareholders And Earning Management In Chinese Listed Corporations

With the development of Chinese security market, more and more importance is being attached to corporate governance. Substantial Shareholders are in dominant position over most corporate decision making, and influent or even control listed firm in China. Meantime, earning management commonly exists in listed firm. According to that, our state made attempt to reduce state-own shares and to reform non-tradable shares. In the circumstance of reform of non-tradable shares, it is worth exploring the relationship between substantial shareholders and earnings management. Moreover, earnings management includes the choice of accounting earnings management and the real activity of earnings management. However, most researches concentrate on the choice of accounting earnings management, ignoring the real activity of earnings management. With securities market supervision strengthened, the room for the former is becoming narrower and narrower. In contrast to that, the real activity of earnings management is popular owing to its elusiveness.This paper studies the relationship between the proportion and status of the first shareholder and earnings management, and earnings management when cash flow rights are separated from voting rights in this paper. The paper proceeds as follows:In section1, the paper discusses China’s institutional background and research significance, then, presents the research framework.In section2, related literature review is made.Section3discusses the theoretical basis of the large shareholder and earnings management. Firstly, this section conducts a comprehensive analysis of earnings management from the prospective of definition, methods and basic conditions for the existence of earnings management. Secondly, based on the Incomplete Contract Theory, Principal-agent Theory, and Control Right Value Theory, the relationship between large shareholders and earnings management is deeply analyzed. Again, listed firm’s dates (2006-2010) are used to analyze the status of large shareholders.Section4develops main hypotheses.In section5, data and variables are discussed. From the domestic and foreign on large shareholders and earnings management. The evidences suggest that the proportion of the first shareholder is positively related to earnings management; when the first shareholder is state-owned share, the earnings management of listed firm is lower; the separation of cash flow right and voting right is positively related to earnings management.Section6concludes.The innovation point of this paper is using empirical research method to attempt to verify the impact of the nature of big shareholders and the separation of two rights on real activities of earnings management. However, the limitation of this paper is obvious. This paper fails to verify the relationship between specific behaviors of earnings management which large shareholders lead to and earnings management. That’s to say, this paper is unable to distinguish among the overall earnings management of samples in which part is caused by big shareholders based on self-interest behavior, which is partially caused by non-self-interest behavior. Using research on control rights value seems able to solve this problem to some extent, but unfortunately, there are no accurate methods of measuring the value of control right, especially the private benefits of control measurement. Therefore, the relationship between the major stockholder control value and earnings management is a worthwhile area.