Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China
Document Type
Journal article
Source Publication
Journal of Corporate Finance
Publication Date
4-1-2010
Volume
16
Issue
2
First Page
225
Last Page
235
Keywords
Corporate governance, Earnings management, Transfer pricing
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.
DOI
10.1016/j.jcorpfin.2009.11.002
Print ISSN
09291199
E-ISSN
18726313
Publisher Statement
Copyright © 2009 Elsevier B.V.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Lo, A. W. Y., Wong, R. M. K., & Firth, M. (2010). Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China. Journal of Corporate Finance, 16(2), 225-235. doi: 10.1016/j.jcorpfin.2009.11.002