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Earnings management and the role of the audit committee: an investigation of the influence of cross-listing and government officials on the audit committee

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  • Teng Lin
  • Marion Hutchinson
  • Majella Percy

Abstract

This paper extends research on the corporate governance practices of transitional economies by examining whether the ability of the audit committee to constrain earnings management in Chinese firms is associated with the listing environment and the presence of government officials on the audit committee. Despite considerable regulatory reforms by the Chinese Securities Regulatory Commission, there remain incentives for Chinese firms to manage earnings. However, government initiatives to encourage domestic firms to cross-list on the Hong Kong Stock Exchange are accompanied by improved governance. We find that the expertise and independence of the audit committee for cross-listed (CL) Chinese firms are associated with lower abnormal accruals, our measure of earnings management. Both domestic only listed firms and CL Chinese firms appoint government officials as independent members on the audit committee. However, due to the political connection between government officials and the controlling shareholder (the State), these appointments can severely mitigate audit committee independence. Subsequently, we find a significant and positive association between audit committee independence and experience and earnings management when there are government officials on the audit committee. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Teng Lin & Marion Hutchinson & Majella Percy, 2015. "Earnings management and the role of the audit committee: an investigation of the influence of cross-listing and government officials on the audit committee," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(1), pages 197-227, February.
    • Handle: RePEc:kap:jmgtgv:v:19:y:2015:i:1:p:197-227
    DOI: 10.1007/s10997-013-9284-3
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    2. Shahanif Hasan & Aza Azlina Md. Kassim & Mohamad Ali Abdul Hamid, 2020. "The Impact of Audit Quality, Audit Committee and Financial Reporting Quality: Evidence from Malaysia," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 272-281.
    3. Ahmad A. Toumeh & Sofri Yahya & Azlan Amran, 2023. "Surplus Free Cash Flow, Stock Market Segmentations and Earnings Management: The Moderating Role of Independent Audit Committee," Global Business Review, International Management Institute, vol. 24(6), pages 1353-1382, December.
    4. Bushra Komal & Bilal & Ernest Ezeani & Asim Shahzad & Muhammad Usman & Juncheng Sun, 2023. "Age diversity of audit committee financial experts, ownership structure and earnings management: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2664-2682, July.
    5. Amad Rashid & Basariah Salim & Halimah Nasibah Ahmad, 2021. "Internal Audit Effectiveness and Audit Committee Characteristics:Empirical Evidence from Pakistan," iRASD Journal of Management, International Research Alliance for Sustainable Development (iRASD), vol. 3(1), pages 1-13, june.
    6. Junwei Lu & Xiaoxia Bu & Jing Chen, 2021. "Do inflowing sophisticated investors induce classification shifting? New evidence from market liberalisation in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(5), pages 6193-6223, December.
    7. Michel Sayumwe, 2019. "Corporate Governance: An Overview. From Creation of Value for Shareholders by the Board to the Duality Role of Its Chairperson," Journal of Business Administration Research, Journal of Business Administration Research, Sciedu Press, vol. 8(1), pages 40-51, April.
    8. Lerong He & Rong Yang & Yuanlong He, 2018. "Does social exchange relationship impair audit committee effectiveness?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 219-249, June.
    9. Qiuyuan Lei & Muhammad Umer Quddoos Attari & Mustansar Hayat & Muhammad Munir Ahmad & Abdul Haseeb & Amir Rafique, 2023. "Mapping the Themes Underlying the Literature on Cross-Listing of Shares—A Contemporary Corporate Strategy of Sustainable Growth," Sustainability, MDPI, vol. 15(12), pages 1-26, June.

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    More about this item

    Keywords

    Audit committee; Earnings management; Corporate governance; Cross-listing; M41; M42; M48; G34;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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