Earnings Management and Investor Protection: An International Comparison

Investor Psychology and Security Market Under- and Overreactions

https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1007&context=soa_research_all

Tunneling through intercorporate loans: The China experience☆

State ownership, the institutional environment, and auditor choice: Evidence from China

Diversified business groups, consisting of legally independent firms operating across diverse industries, are ubiquitous in emerging markets. Groups around the world share certain attributes but also vary substantially in structure, ownership, and other dimensions. This paper proposes a business group taxonomy, which is used to formulate hypotheses and present evidence about the reasons for the formation, prevalence, and evolution of groups in different environments. In interpreting the evidence, the authors pay particular attention to two aspects neglected in much of the literature: the circumstances under which groups emerge and the historical evidence on some of the questions addressed by recent studies. They argue that business groups are responses to different economic conditions and that, from a welfare standpoint, they can sometimes be "paragons" and, at other times, "parasites." The authors conclude with an agenda for future research.

/pdf/business-groups-in-emerging-markets-paragons-or-parasites-4d4n8n1i70.pdf

Business Groups in Emerging Markets: Paragons or Parasites?

Based on a sample of Chinese listed firms from 1998 through 2002, this paper documents that listed firms prop up earnings by using abnormal related sales to their controlling owners. Such related sales propping is more prevalent among state-owned firms and in regions with weaker economic institutions. We also find that these abnormal related sales are not entirely accrual-based but can be cash-based as well, and they serve as a substitute rather than complement to accruals management for meeting earnings targets. Since these abnormal related sales can be cash-based, there is significant cash transfer via related lending from listed firms back to controlling owners after the propping. However, no cash transfer via related lending is found to be associated with accruals earnings management.

Propping through related party transactions

From the U.S. accounting scandals to the emerging markets crisis of 1997-1998, there have been numerous examples of managers or large shareholders using related party transactions to manipulate earnings or divert resources away from their companies. This paper attempts to provide large sample evidence of these transactions in China where the corporate structure, economic institutions and weak legal system are conducive to the related party dealings. Using a sample of 131 Chinese listed firms in the basic materials industries such as mining, lumber, chemicals and building materials, we have found that firms that are controlled by a corporate group engage in more related party transactions than firms that are not. Among the group-controlled listed firms, the results show that they report abnormally high levels of related party sales, mainly to their controlling shareholders and other member firms in the group, when they have incentives to inflate earnings to avoid being delisted or prior to issuing new equity. Once the group-controlled listed firms have generated more free cash flows, they divert resources back to the group through providing other member firms generous trade credits. Our stock return results also confirm the conjectures that at least part of the related party transactions is perceived by the market as opportunistic. Investors view the reported sales figures to be less credible when they are generated from related party dealings than through arm's length transactions. Related party lending is negatively correlated with firm value, as measured by Tobin's Q and market-to-book equity.

Earnings management and tunneling through related party transactions : evidence form Chinese corporate groups

Some Chinese listed companies pay out high dividends, despite the weak legal and institutional pressure on them to mitigate agency problems by paying dividends. We conjecture that such a phenomenon is caused by the differential pricing for tradable and non-tradable shares during the IPO of these listed companies. Such companies might use high-dividend payments to divert proceeds from an IPO or rights issue to controlling shareholders' pockets. The empirical results support our hypotheses, showing that companies with more differential pricing in the IPO, a recent IPO or rights issue, or more concentrated ownership tend to pay more dividends. Similarly, companies that are ultimately owned by the government tend to pay more dividends. Furthermore, a dividend increase accompanied by large IPO price discounts, a recent-year rights issue, an ROE qualified for rights issue, or great dividend variation is associated with more negative stock returns than other types of dividend increases. These findings indicate that dividends are not used purely for signaling or distributing free cash flows in China. Instead, dividends might be used by the controlling shareholders to engage in tunneling.

Dividends for tunneling in a regulated economy: The case of China

CEO compensation and corporate social responsibility

This paper analyzes the causes and consequences of founding family engagement in firm ownership and management. We hypothesize that families manage their firms because they are able to make contributions that non-family managers cannot provide. However, roadblocks arising from within the family, from markets, and from surrounding institutions challenge family ownership. We propose a new framework for organizing these assets and roadblocks, called the family business map; this framework is useful for categorizing the papers presented in this Special Issue. We support the predictions of the framework with evidence from Chinese family firm succession, and conclude that family firm organization is an adaptation to environmental opportunities and constraints. We end the paper with suggestions for future research.

Ming Jian

Papers

Propping through related party transactions

Earnings management and tunneling through related party transactions : evidence form Chinese corporate groups

Dividends for tunneling in a regulated economy: The case of China

CEO compensation and corporate social responsibility

The Family Business Map: Framework, Selective Survey, and Evidence from Chinese Family Firm Succession