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.
| Original language | English |
|---|---|
| Pages (from-to) | 225-235 |
| Number of pages | 11 |
| Journal | Journal of Corporate Finance |
| Volume | 16 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 1 Apr 2010 |
Funding
We thank the referee and Jeff Netter (the editor) for their extensive comments and suggestions on previous versions of the paper. We also thank Gary Xu and seminar participants at Lingnan University and the 2009 JCF Special Conference on Corporate Finance and Governance in Emerging Markets for helpful comments. We thank the Government of the HKSAR (GRF340408) and Lingnan University (DR08A8) for financial support.
Keywords
- Corporate governance
- Earnings management
- Transfer pricing
