Animales de experimentación

The study aims to investigate whether board of directors and supervisory directors actively monitor and take actions that reduce the incidence of earnings management. The board independence and financial expertise of board members required by CSRC are used as measures of corporate governance. Concentrated ownership provides the largest shareholders a substantial discretionary power to allocate the firm’s resources for personal gain at the expense of minority shareholders. To capture the ownership aspect of corporate governance, this study calculates the stake of the largest shareholder to evaluate both the largest

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shareholder’s interest in a company and its power over the board. The board of directors is a second mechanism through which shareholders can exert their influence on the behaviour of managers to make sure that the company operates in their interests (e.g., Hemailin and Weisbach, 2003). In order to measure the effective monitoring role of outside control of the board, this research takes the number of independent directors who are not members of the management team into account. This study considers one more variable to indicate whether or not the controlling shareholder is the government. A dummy variable equals 1 if the government is the controlling shareholder and 0 otherwise. The government is likely to have goals other than profit maximization, such as maintaining employment and social stability. A controlling government stakeholder can use the listed company as a vehicle to achieve its policy goals even though they may conflict with shareholders’ interests (Bai et al. 2000).

Based on prior literature, this empirical study incorporates several influential control variables in the regressions, such as leverage, firm size, firm performance and firm age. Leverage represents the debt structure of a company and is widely used to proxy for the degree of closeness to a debt covenant restriction in previous studies. For instance, Dechow et al. (1996) find that closeness to debt covenant violations stimulate earnings management. Efendi et al. (2007) suggest that when a firm is close to technical default on accounting-based debt covenants, the management may manipulate the accounting numbers to avoid the default. Dechow et al. (1996), Richardson et al. (2002) and Person (2005) link leverage with earnings management (financial statements fraud). Following these prior studies, this study will consider leverage calculated as total debt divided by total assets as a control variable.

Firm Size is often found to have significant impact on internal governance mechanism in prior literature (Wong and Jian 2003; Hu, Tam et al. 2010). The political cost hypothesis proposed by Watts and Zimmerman (1990), predicts that larger firms are more likely to reduce reported earnings to reduce the potential political risk. Wong and Jian (2003) state that large Chinese listed firms have a more extensive network of related parties, making it easier for them to manipulate the reported earnings via non-operating transactions. Thus, firm size is included as a control variable measured as the natural logarithm of total assets.

Firm Performance: Return on assets (ROA) is used in many studies on both corporate governance and earnings management to control for the firm’s performance (e.g. (Kothari, Leone et al. 2005); Kiel and Nicholson, 2003; Carter et al., 2003). Beneish (2001)

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demonstrate that earnings management is more likely to occur when a firm’s performance is either unusually good or bad. In addition, Carter et al. (2003) find that ROA is highly significant in explaining Tobin’s Q and firm’s value. Hence, ROA can be considered as a robust measure of firm performance. In this study, ROA is calculated as net income divided by the total assets at the beginning of the testing period. Meanwhile, due to the tight regulation on delisting issued by CSRC, it is more likely that ‘ST’ and ‘PT’ companies will present a higher degree of earnings management to avoid delisting.

Firm age：Evidence in prior literature has shown that young firms with high growth are more likely to commit financial statement fraud because they have strong financing needs, in addition, young firms are prone to have weaker governance structures and internal controls lag behind operations and have greater risk of distress (Beneish 1999). However, other researchers argue that older firms would be benefited from their ability to secure resources and their industrial experience. The old Chinese enterprises are characterized by both resource advantage and social burden (e.g. (Tian and Lau 2001)). Given the possible influences of firm age on organizational performance, it is incorporated as a control variable.

Therefore, the regression models are expressed as follows:

𝑫𝒊𝒔𝑨𝒄𝒄𝒋𝒕 = 𝛼 + 𝛽1𝑇𝑂𝑃1𝑗𝑡+ 𝛽2𝑆𝑡𝑎𝑡𝑒𝑜𝑤𝑛𝑒𝑑𝑗𝑡+ 𝛽3𝐵𝑂𝐴𝑅𝐷_𝑀𝐸𝐸𝑇𝑗𝑡+ 𝛽4𝑆𝐵_𝑀𝐸𝐸𝑇𝑗𝑡 + 𝛽5𝐼𝑁𝐷_𝑀𝑒𝑒𝑡_𝐴𝑡𝑡𝑗𝑡+ 𝛽6𝐷𝑖𝑟𝑒𝑐𝑡_𝑁𝑜𝑗𝑡+ 𝛽7𝐼𝑁𝐷_𝑁𝑜𝑗𝑡 + 𝛽8𝑆𝐵𝑀_𝑁𝑜𝑗𝑡+𝛽9𝐼𝑁𝐷_𝐸𝑥𝑝𝑒𝑟𝑡_𝑁𝑜 𝑗𝑡+ 𝛽10𝑆𝐵_𝐸𝑥𝑝𝑒𝑟𝑡_𝑁𝑜𝑗𝑡 + 𝛽₁₁𝑆𝐵_𝑂𝑓𝑓𝑖𝑐𝑖𝑎𝑙𝑠_𝑗𝑡+ 𝛽₁₂𝐼𝑁𝐷_𝑅𝑎𝑡𝑖𝑜_𝑗𝑡+ 𝛽₁₃𝐹𝑖𝑟𝑚𝐴𝑔𝑒_𝑗𝑡+ 𝛽₁₄𝑅𝑂𝐴_𝑗𝑡 + 𝛽₁₅𝑆𝐼𝑍𝐸_𝑗𝑡+ 𝛽₁₆𝐿𝐸𝑉_𝑗𝑡+ 𝛽₁₇𝑌𝑒𝑎𝑟𝐷𝑢𝑚𝑚𝑦_𝑗𝑡+ 𝛽₁₈𝐼𝑛𝑑𝑢𝑠𝐷𝑢𝑚𝑚𝑦_𝑗𝑡+ 𝜀_𝑗𝑡 (Equation 2.6) Or 𝑫𝒊𝒔𝑹𝒆𝒗_𝒋𝒕 = 𝛼 + 𝛽₁𝑇𝑂𝑃1_𝑗𝑡+ 𝛽₂𝑆𝑡𝑎𝑡𝑒𝑜𝑤𝑛𝑒𝑑_𝑗𝑡+ 𝛽₃𝐵𝑂𝐴𝑅𝐷_𝑀𝐸𝐸𝑇_𝑗𝑡+ 𝛽₄𝑆𝐵_𝑀𝐸𝐸𝑇_𝑗𝑡 + 𝛽₅𝐼𝑁𝐷_𝑀𝑒𝑒𝑡_𝐴𝑡𝑡_𝑗𝑡+ 𝛽₆𝐷𝑖𝑟𝑒𝑐𝑡_𝑁𝑜_𝑗𝑡+ 𝛽₇𝐼𝑁𝐷_𝑁𝑜_𝑗𝑡 + 𝛽₈𝑆𝐵𝑀_𝑁𝑜_𝑗𝑡+𝛽₉𝐼𝑁𝐷_𝐸𝑥𝑝𝑒𝑟𝑡_𝑁𝑜 _𝑗𝑡+ 𝛽₁₀𝑆𝐵_𝐸𝑥𝑝𝑒𝑟𝑡_𝑁𝑜_𝑗𝑡 + 𝛽11𝑆𝐵_𝑂𝑓𝑓𝑖𝑐𝑖𝑎𝑙𝑠𝑗𝑡+ 𝛽12𝐼𝑁𝐷_𝑅𝑎𝑡𝑖𝑜𝑗𝑡+ 𝛽13𝐹𝑖𝑟𝑚𝐴𝑔𝑒𝑗𝑡+ 𝛽14𝑅𝑂𝐴𝑗𝑡 + 𝛽15𝑆𝐼𝑍𝐸𝑗𝑡+ 𝛽16𝐿𝐸𝑉𝑗𝑡+ 𝛽17𝑌𝑒𝑎𝑟𝐷𝑢𝑚𝑚𝑦𝑗𝑡+ 𝛽18𝐼𝑛𝑑𝑢𝑠𝐷𝑢𝑚𝑚𝑦𝑗𝑡+ 𝜀𝑗𝑡 (Equation 2.7)

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Table 2.3 explains the definitions and measurements of variables utilized in this empirical modeling as follows.

Table 2.3Variables definition and measurement

Dependent Variables Definition

Discretionary Accruals

Discretionary Revenues

The abnormal accruals are residuals derived from the modified Jones model with performance-matched estimates (Equation 2.4).

The abnormal revenues are the residuals derived from Discretionary Revenue model (Equation 2.5).

Independent Variables Definition

TOP1 Percentage of shares owned by the largest shareholder

State-owned If the company is state-owned, it is 1; otherwise, coded 0.

BOARD_MEET The frequency of meetings of the Board

SB_MEET The frequency of meetings of the Supervisory Board

IND_Meet_Att The meeting attendance rate of Independent Directors

Direct_No The number of Directors in the Board

IND_No The number of Independent Directors in the Board

SBM_No The number of Supervisory Board Member

IND_expert_no The number of independent Directors with financial or accounting expertise

SB_expert_no

SB_official_no

The number of Supervisors with financial or accounting expertise

The number of Supervisors with official background

IND_No. If the number of Independent Directors exceeds 1/3, it is coded

as 1; otherwise, coded 0.

Control Variables Definition

Firm Age How long have the firm operated since its foundation

ROA (Return on Assets) Return on assets=Net Profit/Total Assets

SIZE Natural Logarithm of the average Total Assets

LEV Total Debt/Total Assets

Time Effect Year Dummy

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