This study examines whether board independence is an effective corporate
governance mechanism in reducing earnings management in China, a country with
significantly different institutional and legal characteristics from the Anglo-Saxon
countries. I investigate: (i) whether voluntary adoption of board independence prior to
the China Regulatory Securities Commission (CSRC) regulation on board independence
is associated with lower earnings management; and (ii) the extent to which the CSRC
regulation is effective in achieving the aim of inhibiting earnings management. I employ
two stage least squares techniques to control for potential simultaneity problems between
earnings management and board independence and documents that failing to control for
such problems will lead to biased and inconsistent estimates. Using three different
measures of earnings management, I show that firms that voluntarily move towards
board independence (i) have lower levels of discretionary accruals; (ii) employ less
severe income smoothing strategies; and (iii) are less likely to manage return on equity
to meet regulatory thresholds. In contrast, firms adopting board independence following
the CSRC regulation in 2002 do not experience any changes in the levels of earnings management before and after the regulation. These results suggest that regulation alone
is not a sufficient solution to motivate effective independent boards.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/4307 |
| Date | 30 October 2006 |
| Creators | Lai, Liona Hoi Yan |
| Contributors | Rees, Lynn |
| Publisher | Texas A&M University |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Dissertation, text |
| Format | 355978 bytes, electronic, application/pdf, born digital |
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