OWNERSHIP STRUCTURES AND RISK OF FINANCIAL MISREPORTING: EVIDENCE FROM CHINA

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Abstract

This study examines the association between the role of ownership structures and the risk of misreporting (earnings management and fraud) using a sample of 2,170 firm-years listed on the Shanghai A stock market between the years of 2004 and 2006. We used three different ownership structures (i.e., institutional, state and tradable ownership) and two earnings management methods (i.e., accruals-based and real earnings management) to investigate whether firms with various ownership structures will choose earnings management methods that damages the actual values the least, lowers earnings management and whether this lowers the risk of financial misreporting fraud. The major findings are as follows. First, we find that institutional ownership is negatively associated with earning management and lowers the risk of financial misreporting. Institutional ownership can prevent listed companies from real activities earnings management, and it negatively affects accruals-based earnings management in low state share firms but not in high state share firms. Second, we find that state ownership is positively associated with earnings management but lowers the risk of financial misreporting. Third, tradable shares are negatively but not significantly related to accruals-based earnings management but increase the risk of financial misreporting. According to our findings, state ownership has great impact on listed companies; it also impedes the active role of other shareholders in invested companies. This study supports calls for restructuring and strengthening the role of governance by institutional shareholders, reinforcing and transforming the function of state-owned asset supervision and administration commission of the state council (SASAC, an agent organisation of state shares) from inefficient state investors to efficient institutional investors.

Keywords: Institutional Ownership, State Ownership, Tradable Ownership, Earnings Management, Financial Misreporting

How to cite this paper: Lee, J., & Jin, L. (2012). Ownership structures and risk of financial misreporting: Evidence from China. Corporate Ownership & Control, 9(3-3), 330-344. https://doi.org/10.22495/cocv9i3c3art2