Board Governance and Earnings Management of Chinese listed companies

Abstract

According to current stage of China's capital market development and pervasive earnings management in Chinese listed companies, this paper systematically investigates the role of listed companies’ board governance in constraining earnings management. Based on the measurement of earnings management in Chinese listed companies by using Modified-Jones Model, this paper first proposes four theoretical hypotheses that suggest earnings management is negatively associated with board size, board independence, separation of the roles of CEO and board chair and board meeting frequency; then using panel data of 93 Chinese A-share listed companies during 2006-2009 and controlling for corporate size, return on equity and other factors, the paper examines the relations between board governance variables and earnings management. Results show that earnings management of Chinese listed companies is positively correlated to board size, which does not support Hypothesis1; Results also suggest that earnings management is negatively correlated with board independence, which is consistent with Hypothesis 2. The results indicate earnings management is negatively correlated to the separation of the roles of CEO and board chair, which shows great support to Hypothesis 3. In addition, Hausman test is conducted and the result shows random effect can better explain the panel data model.