| Nowadays there have been numerous examples that large shareholders use related party transactions to manipulate earnings or divert resources away from their companies. Thus, This paper attempts to employ empirical study on earnings management and tunneling through related party transactions. This article is firstly theoretical analysis on earnings management and tunneling through related party transactions. Then legal system, characteristics, causes and impact of related party transactions are summarized. This article adopts different token variable to detect incentives of earnings management and tunneling through related party transactions. It can conclude as follows: these earnings management and tunneling through related party transactions have three stages; earnings management during initial public offerings, earnings management and tunneling after IPO, and tunneling after special treatment; earnings management and tunneling are less severer in the listed companies controlled by the National State Assets Administration Bureau than non-NSAAB controlled firms; these controlled firms engage in more related-party lending than firms that are not; when listed firms have generated more cash from operations, they will divert resources to the group by offering generous credits; loss firms have more incentives to manage earnings on related-party transactions to turn profit. And then a case is used to further prove statistic conclusions. Also this paper studies the response of A-share market to the announcement on the related-party transactions, using the method of excess earnings and multiple regression analysis. Stock market makes weakly positive response to the announcement on the important related-party sales and weakly negative response to expropriation by the controlling related-party. Finally some supervision suggestions such as perfecting legal system, setting up the clear ownership, strengthening the supervision are proposed.
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