Related party transactions as a source of earnings management

Jean Jinghan Chen, Peng Chengb, Xinrong Xiao

Research output: Contribution to journalArticlepeer-review

50 Citations (Scopus)

Abstract

In this article, we contribute to the earnings management literature by addressing the issue of Related Party Transactions (RPTs) during a firm's Initial Public Offering (IPO) process. We regard RPT-based earnings management as a kind of agency problem in the context of Chinese IPOs, and argue that the conflicts of interests between the controlling shareholders and the minority shareholders are the root of RPT-based earnings management in Chinese IPOs. We provide empirical evidence to demonstrate that RPT-based earnings management in a portfolio of earnings management tools including accruals management, and how it affects the firm's post-IPO long-term performance in China. Using 257 Chinese A and B shares IPOs during 1999 and 2000, our empirical findings suggest that controlling shareholders structure operating RPTs in pre-IPO period and these RPTs are positively associated with firm's operating performance.The decline in operating RPTs after IPO contributes to firm's post-IPO long-term underperformance and negatively affects firms' stock return.

Original languageEnglish
Pages (from-to)165-181
Number of pages17
JournalApplied Financial Economics
Volume21
Issue number3
DOIs
Publication statusPublished - Feb 2011

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