The Impact Of Corporate Governance On Firms' Performance And Earnings Management: The Case Of China's Listed Firms

The current thesis aims at examining the effects of corporate governance on firms' performance and on earnings management in China.We will identify the most important corporate governance mechanisms that affect operating decisions and accounting choices,investigate the tools which are being used by managers to increase earnings and performance in industrial firms,and finally,determine which accruals model is more suitable to detect earnings management in China industrial companies.Previously,corporate governance mechanisms considered to be the most important factors in assessing and monitoring the effectiveness of financial reporting(Brown,Pottb and W?mpenerb,2014),and the cornerstone of control in general.Internal and external corporate governance were put in place by senior managers to improve the efficiency and effectiveness of operations and reduce the incidence of error or manipulation in accounting systems(Lee,2006).Earnings management is considered one of the most important issues related to financial reporting,particularly after the Enron and WorldCom scandals.Earnings management behaviors are also related to low levels of corporate social responsibility and improvements in both areas would be expected to bring improvements in the quality of corporate governance.Previous works,on India for example have shown that having board independence did not guarantee the improvement of firm performance due to poor monitoring roles of independent directors.Findings on the United States,the United Kingdom,New Zealand or Korea were not consensual.As China is becoming a realm for thriving businesses,there is one important question one should ask: “What are the core values that drive such a success is there any difference with other countries?” To examine this question,we will use available updated data from 2008 to 2014,on 2,098 Chinese's listed companies for empirical evidence.Firms' performance was measured using the return on equity,the return on assets and Tobin's Q ratios whilst “discretionary accruals” was used as a proxy for earnings management.Two different regression models including pooled OLS and fixed effects were used to test our hypotheses.Main findings indicate that CEO duality and larger boards are detrimental to the firm performance.By contrast,firms perform better when a board includes more independent directors.Furthermore,firms with smaller boards have better earnings quality.These results reveal that board size is a key factor for firms' performance in China.In general,boards do not exceed 22 members and the highest share of independent directors is nearly 37% of boards' seats.This discovery may be an important hint not only for new local ventures and also for foreign partners willing to cooperate with Chinese firms.