Trading and earnings management: Evidence from China’s non-tradable share reform

http://ac.els-cdn.com/S0929119915000140/1-s2.0-S0929119915000140-main.pdf?_tid=6d8b6b82-af6a-11e4-aefe-00000aacb35e&acdnat=1423383416_7c29f0f5118532277231da624c46ae5a

Journal of Corporate Finance Volume 31, April 2015, Pages 67–90

Trading and earnings management: Evidence from China’s non-tradable share reform

Gang Xiao

Highlights

  • China’s non-tradable share reform converted non-tradable shares to tradable.
  • Earnings management increases after the government enforced the reform.
  • Market participants respond less favorably to earnings surprises after the reform.
  • Trading by blockholders and insiders explains the rise in earnings management.

Abstract

This paper examines the effect of trading on earnings management under the setting of China’s non-tradable share reform. The government-enforced reform converted non-tradable shares to tradable and thus enabled blockholders and insiders to reduce holdings via public trading. We find significant increases in accruals among Chinese listed companies after the reform. The impact of the reform on earnings manipulations is increasing with the potential for share trading, the degree of information asymmetry and the intensity of stock selling by insiders and blockholders. Our findings support that trading by large shareholders and insiders significantly increases earnings manipulations.

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