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Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China

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  • Lo, Agnes W.Y.
  • Wong, Raymond M.K.
  • Firth, Michael
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    Abstract

    This study investigates whether good governance structures help constrain management's opportunistic behaviors (in the form of transfer pricing manipulations) in one of the world's most dynamic economies. Our data are a unique sample of 266 companies listed on the Shanghai stock exchange that disclose gross profit ratios on related-party transactions. We find that firms with a board that has a higher percentage of independent directors or a lower percentage of "parent" directors (i.e., directors who are representatives of the parent companies of the listed firms), or have different people occupying the chair and CEO positions, or have financial experts on their audit committees, are less likely to engage in transfer pricing manipulations. Overall, our research findings reveal that the quality of corporate governance is important in deterring the use of manipulated transfer prices in related-party sales transactions.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 16 (2010)
    Issue (Month): 2 (April)
    Pages: 225-235

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    Handle: RePEc:eee:corfin:v:16:y:2010:i:2:p:225-235

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Transfer pricing Corporate governance Earnings management;

    References

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    Cited by:
    1. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    2. Masood Fooladi Chaghadari Author_Email: foladim57@gmail.com & Zaleha Abdul Shukor, 2011. "Corporate Governance And Disclosure Of Related Party Transactions," 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding 2011-267, Conference Master Resources.
    3. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
    4. Huang, Hui & Shi, Xiaojun & Zhang, Shunming, 2011. "Counter-cyclical substitution between trade credit and bank credit," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1859-1878, August.
    5. Tang, Tanya & Firth, Michael, 2011. "Can book-tax differences capture earnings management and tax Management? Empirical evidence from China," The International Journal of Accounting, Elsevier, vol. 46(2), pages 175-204, June.
    6. Jin-hui Luo & Di-fang Wan & Di Cai, 2012. "The private benefits of control in Chinese listed firms: Do cash flow rights always reduce controlling shareholders’ tunneling?," Asia Pacific Journal of Management, Springer, vol. 29(2), pages 499-518, June.
    7. Zhang, Yuyang & Uchida, Konari & Bu, Hua, 2013. "How do accounting standards and insiders' incentives affect earnings management? Evidence from China," Emerging Markets Review, Elsevier, vol. 16(C), pages 78-99.

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