Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China

Wai Yee, Agnes LO, Man Kong, Raymond WONG, Michael FIRTH

Research output: Journal PublicationsJournal Article (refereed)

110 Citations (Scopus)

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 languageEnglish
Pages (from-to)225-235
Number of pages11
JournalJournal of Corporate Finance
Volume16
Issue number2
DOIs
Publication statusPublished - 1 Apr 2010

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Keywords

  • Corporate governance
  • Earnings management
  • Transfer pricing

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