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Corporate governance and income smoothing in China

Author

Listed:
  • Chi‐Yih Yang
  • Boon Leing Tan
  • Xiaoming Ding

Abstract

Purpose - The purpose of this paper is to examine empirically whether corporate governance mechanisms have an effect on income‐smoothing behavior in the People's Republic of China. Design/methodology/approach - The sample comprises 1,358 companies listed in the Shanghai Stock Exchange and the Shenzhen Stock Market during the period 1999 to 2006. By comparing the variability of income to the variability of sales, an income smoother can be identified if income is less variable than sales. Findings - The authors' empirical results show that income smoothing is more severe when the state is the controlling shareholder of the Chinese listed firm. Firms with more independent directors are more likely to engage in income smoothing. The governance mechanisms such as board of directors, supervisory board, audit committee, external auditors, and shareholders' participation are not effective in curtailing income smoothing in China. Practical implications - For Chinese firms and especially government‐linked enterprises, the way in which they present themselves may be significant, since the image they present to potential strategic partners may be marred by suspicions of income smoothing. Originality/value - The paper presents the current development of China's corporate governance system and indicates that agency conflicts between controlling shareholders and minority investors account for a significant portion of earnings management in China.

Suggested Citation

  • Chi‐Yih Yang & Boon Leing Tan & Xiaoming Ding, 2012. "Corporate governance and income smoothing in China," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 10(2), pages 120-139, October.
    • Handle: RePEc:eme:jfrapp:v:10:y:2012:i:2:p:120-139
    DOI: 10.1108/19852511211273688
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    Citations

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    Cited by:

    1. Silhan, Peter A., 2014. "Income smoothing from a Census X-12 perspective," Advances in accounting, Elsevier, vol. 30(1), pages 106-115.
    2. Khaldoon Aldaoud, 2019. "The Impact of Board Independence, Women on Board and Auditor Independence on the Fraud: Evidence from Jordanian Firms," Proceedings of International Academic Conferences 9710771, International Institute of Social and Economic Sciences.
    3. Doan, Anh-Tuan & Lin, Kun-Li & Doong, Shuh-Chyi, 2020. "State-controlled banks and income smoothing. Do politics matter?," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Juhendra Debbarma & Chinmoy Roy, 2023. "Effects of Corporate Governance on Creative Accounting Practices: Evidence from NSE-listed Companies in India," Indian Journal of Corporate Governance, , vol. 16(1), pages 52-78, June.
    5. Alison Lui, 2015. "Cross-border share voting and improving voting chain deficiencies in the 21st century," International Journal of Corporate Governance, Inderscience Enterprises Ltd, vol. 6(1), pages 70-85.
    6. Doan, Anh-Tuan & Lin, Kun-Li, 2022. "Bank ownership and stock price informativeness. Does politics matter?," International Review of Financial Analysis, Elsevier, vol. 79(C).
    7. Lalanne, Marie & Seabright, Paul, 2016. "The old boy network: The impact of professional networks on remuneration in top executive jobs," SAFE Working Paper Series 123, Leibniz Institute for Financial Research SAFE.
    8. Zagorchev, Andrey & Gao, Lei, 2015. "Corporate governance and performance of financial institutions," Journal of Economics and Business, Elsevier, vol. 82(C), pages 17-41.

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