Journal of Business Finance & Accounting
Volume 41, Issue 7-8, pages 831–866, September/October 2014
Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases
Joseph P.H. Fan, Feng Guan, Zengquan Li and Yong George Yang†,*
The measurement difficulties arising from relationship-based business transactions can result in accounting opacity. We test this hypothesis by exploiting a natural experiment. Using a sample of firms that were networked with 45 high-level Chinese bureaucrats involved in corruption scandals between 1996 and 2007, we examine the patterns in the earnings informativeness of these firms before and after the exogenous break of the networks. We predict that the costs and benefits of business-politics relationships, which are not measurable by the current accounting systems, diminish the ability of accounting earnings to track a firm’s economic performance. In turn, a break in a political relationship due to anti-corruption enforcement reduces the measurement noise and improves the earnings informativeness. We find that, relative to the matched control firms, there is indeed a significant increase in the earnings informativeness of the networked firms following the public exposure of a scandal. Robustness tests fail to show that the documented improvement in the earnings informativeness is primarily due to systematic changes in the firms’ earnings management behavior or disclosure policies.
Read this together with “Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases” (Link)
Investors rush to cash in shares linked to Ling family
Wednesday, 24 December, 2014, 5:15am
Daniel Ren in Shanghai email@example.com
Shares of the seven listed firms linked to the family of Ling Jihua fell yesterday as probes into the top aide to former president Hu Jintao prompted investors to cash out amid fears of a further slide. Continue reading →
Posted by GOH Shu Qi, Year 3 undergrad at the School of Accountancy, Singapore Management University
Read this together with “Investors rush to cash in shares linked to Ling family” (Link) and “Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases” (Link).
China sentences state-owned firm chief to death for graft
11 Dec11:51 AM
[BEIJING] China has sentenced the head of a state-owned company to death for corruption involving nearly 400 million yuan (S$84.9 million), state media reported, in a rare instance of an official being condemned to die. Continue reading →
Posted by Stephanie TAN Ming Min, Year 4 undergrad at the School of Business, Singapore Management University
Short-seller Block: Markets overvalued, even after sell-off
In the video, Muddy Waters founder, Carson Block, talks about his latest investment calls – specifically about how the stocks of Chinese lottery company, 500.com, should trade at a lower multiple due to the risk of accounting fraud especially with the way the company channels its funds. Following which, Block discusses why accounting fraud is so prevalent in China. Continue reading →
The milkman rings twice: Zheng Junhuai’s return to the dairy industry
Sunday, 11 January, 2015, 3:38am
Alice Yan firstname.lastname@example.org
‘Dairy Godfather’ Zheng Junhuai has returned to the industry after a spell in jail, saying he is the man to clean up the baby milk formula business
The man once known as the “Dairy Godfather” of China is making a bid for another title: “Comeback King”.
A decade ago, Zheng Junhuai was one of China’s best-known entrepreneurs. In the late 1980s, he had taken over a dying Mongolian dairy workshop and revived it to become China’s biggest dairy producer in terms of revenue by the early 2000s.
But as Yili’s fortunes grew, Zheng’s standing abruptly fell.
On the afternoon of December 17, 2004 – Zheng remembers the date clearly – he was hauled away by Hohhot prosecutors. One year later he was thrown in jail with a six-year sentence for embezzling more than 16 million yuan (HK$20 million). Continue reading →
Journal of Business Ethics
January 2015, Volume 126, Issue 1, pp 3-19
Is Tone at the Top Associated with Financial Reporting Aggressiveness?
Lorenzo Patelli, Matteo Pedrini
The discussion about the relationship between tone at the top and financial reporting practices has been primarily focused on the oversight role played by the board of directors and other structural elements of corporate governance. Another relevant determinant of tone at the top is the corporate narrative language, since it is a fundamental way in which the chief executive officer (CEO) enacts leadership. In this study, we empirically explore the association between financial reporting aggressiveness and five thematic indicators capturing different traits of ethical leadership from 535 annual letters to shareholders. We find that aggressive financial reporting is positively associated with CEO letters using a language which is resolute, complex, and not engaging. Our empirical findings highlight the importance of examining discretionary corporate narratives for the auditing process and the role of tone at the top in influencing accounting practices.
Looking Attractive until You Sell: Earnings Management, Lockup Expiration, and Venture Capitalists
Dae-il Nam1,*, Haemin Dennis Park2and Jonathan D. Arthurs3
Journal of Management Studies
Volume 51, Issue 8, pages 1286–1310, December 2014
Earnings management occurs when managerial discretion allows managers to influence reported earnings and thus mislead some investors about the underlying economic performance and quality of the firm. This study considers how potential investors may guard against earnings management by observing negative stock price reaction at the lockup expiration period of initial public offering (IPO) firms as a negative signal. Findings from a sample of 160 newly public firms show that earnings management behaviour is stronger in IPO firms backed by venture capitalists (VCs). Moreover, VC reputation negatively moderates this relationship such that IPO firms backed by reputable VCs are less likely to manage earnings, suggesting that reputable VCs serve an auditing function following an IPO. Overall, we provide insights into signalling theory by examining negative signals arising from the behaviour of multiple agents in an IPO firm.
Journal of Multinational Financial Management
Volume 28, December 2014, Pages 62–78
Mutual funds’ holdings and listed firms’ earnings management: Evidence from China ☆
Jing Chia, , , Jingjing Yangb, 1, , Martin Younga, c, 2,
- Chinese long-term mutual funds’ holdings have an insignificant impact on accruals.
- Chinese short-term funds’ holdings encourage an increase in earnings management.
- Long- or short-term funds impact different earnings management measures differently.
- Funds’ impact on earnings management is stronger in non-state-controlled firms.
This study examines the impact of long-term and short-term mutual funds’ ownership on various types of earnings management in China. We find that both long-term and short-term funds’ holdings can lead to reduced non-core income. However, long-term mutual funds’ holdings have an insignificant impact on accrual items, while short-term funds’ holdings encourage an increase in accruals. The positive influence of short-term funds’ holdings on accruals is much stronger than their negative impact on non-core income. Finally, we find the impact of mutual funds’ holdings on earnings management is much stronger in non-state-controlled listed firms than that in state-controlled ones.