The Impact of the Corporate Governance Code on Earnings Management: Evidence from Chinese Listed Companies

This study examines the impact of the implementation of the Code of Corporate Governance for Listed Companies in China (the Code) in 2002 on constraining earnings management in Chinese listed firms. We find the magnitudes of both discretionary accruals and related-party transactions in Chinese listed firms decrease significantly after the promulgation of the 2002 Code, and moreover, the Code is effective in constraining earnings management in the listed firms. However, with regard to the ownership concentration, we find that when a firm has a controlling shareholder, especially the state, it utilises all possible means of earnings management to artificially dress-up the firm’s apparent performance and the influence of the 2002 Code on reducing earnings management is minimal. However, we find that the privately-owned enterprises engage less in earnings management practices than the state-controlled firms do across the study period and the Code enhances this effect significantly. The impact of the Code on improving the institutional investors monitoring in mitigating earnings management is limited. However, the Code has a positive impact on curbing earnings management through the introduction of independent non-executive directors on the board and the audit committee and the accounting/financial experts sitting on the audit committee. In contrast to the existing literature on the Western markets, we find that international reputable audit firms (Big 4) does not contribute to the reduction in earnings management in Chinese listed firms.