Are State-Owned Enterprises Equally Reliable Information Suppliers? An Examination of the Impacts of State Ownership on Earnings Management Strategies of Chinese Enterprises

Abstract

Earnings management refers to a company’s use of either accounting techniques (accrual-based earnings management) or real economic activities (real earnings management) to manipulate reported earnings and mislead users of financial information. It often indicates serious ethical issues in a company’s management, which will affect the reliability and sustainability of a firm’s services in the supply chain. Using A-share listed Chinese firms on the Shanghai and Shenzhen Stock Exchanges, we investigated the impacts of state ownership on management’s decision to select real or accrual-based earnings management strategies. We found that state-owned enterprises (SOEs) tend to favor real earnings management over accrual-based earnings management more than non-SOEs. Furthermore, those SOEs that are controlled by the central government engage in real earnings management more often than those controlled by local governments. We also examined whether media attention and litigation interact with state ownership to affect earnings management. We found that SOEs, especially central SOEs, with a high level of media attention or an incidence of litigation, are more likely to use real earnings management. Our research can assist firms in making better decisions in selecting business partners and service suppliers in an emerging market through the assessment of management integrity.

Earnings quality and national IPO: AEM practices of Central Asia

“…For example, Lu using 11,905 A-share listed Chinese firm-year observations on the Shanghai and Shenzhen Stock Exchanges, investigated effects of State ownership on management's decision to select REM/AEM earnings management strategies. Authors found that state-owned enterprises tend to favor REM over AEM earnings management strategies more than private [10]. However, SOEs could have different level of government engagement, and privatized SOEs might look more similar to POEs instead.…”

Earnings quality and national IPO: Central Asian case

“…Contemporaneous studies on Earnings management and ownership structure (Lu et al, 2023) using A-share listed Chinese firms on both the Shanghai and Shenzhen Stock Exchanges, investigated impacts of State ownership on management's decision to select REM or AEM earnings management strategies. Authors found that state-owned enterprises tend to favor REM over AEM earnings management strategies more than private.…”