Share types and earnings management: evidence from Chinese listed companies

This study contributes to the literature on the ownership structure by investigating the effect of special share types on the practice of earnings management in China. Equity ownership in listed Chinese companies have five different types: state-owned shares, legal person shares, employee shares, A-shares, and B- & H-shares, which is a phenomenon unique to the Chinese equity market. Empirical analysis shows that different share types and mixed ownership structure significantly affect the company’s earnings management. Using a sample of 544 listed Chinese company-years, this study finds that the state-owned shares and legal person shares are positively associated with earnings management. However, the proportion of B- & H-shares is not related to earnings management. In addition, empirical results of this study also show evidence in support of a positive relationship between the proportion of A-shares and earnings management. Since that the empirical findings indicate that state-owned shares and legal person shares cannot mitigate earnings management, transferral of more those type of shares to public, therefore, may mitigate earnings management. However, because currently, in China, shares are still largely owned by the state or legal persons, the magnitude of earnings managements is still maintained in a relative high level. In addition, public A-shares show a positive relation with earnings management which indicates that China’s ownership structure reform may not be as effective as China Securities Regulatory Commission (CSRC) expected. Further structure reform is required in achieving a better corporate governance practice.