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Do more foreign strategic investors and more directors improve the earnings smoothing? The case of China

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  • Wu, Meng-Wen
  • Shen, Chung-Hua
  • Lu, Chin-Hwa

Abstract

Since 2004, Chinese government requests the local banks to invite foreign financial institutions to be one or more of the large shareholders in the local banks. These foreign financial institutions are commonly referred to as the foreign strategic investors (FSIs), whose aim is to improve the performance and governance of the local banks. This study investigates whether FSIs can influence the earnings smoothing (ES) of local Chinese banks, which is dubbed as the “FSI effect.” If such effect is observed, we examine whether the transmission is achieved through the “accounting quality channel” (i.e., more FSIs reduce Chinese banks' ES) or the “safety and soundness channel” (i.e., more FSIs strengthen these banks' ES). We use data from 102 local banks from 2006 to 2011 to examine the FSI effect and the two channels by considering banks with zero, one, and two FSIs. Our results support the safety and soundness channel, indicating that more FSIs enhance ES and a stronger FSI effect for banks with more FSIs and more FSI directors.

Suggested Citation

  • Wu, Meng-Wen & Shen, Chung-Hua & Lu, Chin-Hwa, 2015. "Do more foreign strategic investors and more directors improve the earnings smoothing? The case of China," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 3-16.
    • Handle: RePEc:eee:reveco:v:36:y:2015:i:c:p:3-16
    DOI: 10.1016/j.iref.2014.11.003
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    2. Lin, Yongjia Rebecca & Fu, Xiaoqing Maggie, 2017. "Does institutional ownership influence firm performance? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 17-57.
    3. Ozili, Peterson K, 2019. "Bank Income Smoothing, Institutions and Corruption," MPRA Paper 92339, University Library of Munich, Germany.
    4. Maoyong Cheng & Hong Zhao & Mingming Zhou, 2016. "The effects of foreign strategic investors on business models in China’s commercial banks: does ownership structure matter?," Applied Economics, Taylor & Francis Journals, vol. 48(58), pages 5676-5698, December.
    5. Lee, Youkyoung & Cho, Myeonghyeon, 2016. "Does control-ownership disparity matter to foreign investors in Korea?," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 219-231.
    6. Skała, Dorota, 2021. "Loan loss provisions and income smoothing – Do shareholders matter?," International Review of Financial Analysis, Elsevier, vol. 78(C).
    7. Liang, Hsin-Yu & Chen, I-Ju & Chen, Sheng-Syan, 2016. "Does corporate governance mitigate bank diversification discount?," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 129-143.
    8. Ozili, Peterson K & Outa, Erick R, 2018. "Bank Income Smoothing in South Africa: Role of Ownership, IFRS and Economic fluctuation," MPRA Paper 102567, University Library of Munich, Germany.
    9. Ozili, Peterson K, 2017. "Bank Loan Loss Provisions Research: A Review," MPRA Paper 76495, University Library of Munich, Germany.
    10. Ren, Meixu & Ke, Konglin & Yu, Xin & Zhao, Jinxuan, 2023. "Local governments' economic growth target pressure and bank loan loss provision: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 1-14.
    11. Albulena Shala & Valentin Toçi & Skender Ahmeti, 2020. "Income smoothing through loan loss provisions in south and Eastern European banks," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 429-452.
    12. Ozili, Peterson K., 2019. "Bank income smoothing, institutions and corruption," Research in International Business and Finance, Elsevier, vol. 49(C), pages 82-99.
    13. Chauhan, Yogesh & Kumar, Surya B., 2019. "Does accounting comparability alleviate the informational disadvantage of foreign investors?11We thank the editor, Professor Carl R. Chen, and two reviewers for their comments that greatly improved th," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 114-129.
    14. Malek Hamed Alshirah & Azhar Abdul Rahman & Ifa Rizad Mustapa, 2019. "The Role of Foreign Directors in Corporate Risk Disclosure: Empirical Evidence From Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(4), pages 119-127, July.
    15. Cheng, Maoyong & Geng, Hongyan & Zhang, Junrui, 2016. "Chinese commercial banks: Benefits from foreign strategic investors?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 147-172.

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    More about this item

    Keywords

    Foreign strategic investors; Income smoothing; Loan loss provisions; Chinese banks;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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