Pyramidal Ownership Structure And Earnings Management

Most studies about whether corporate governance practices have an effect on earnings management focus on the direct ownership structure. Recently, researches find that, in contrast to Berle and Means's image of ownership of the modern corporation, most companies are controlled by the controlling shareholder (trace to the ultimate owner). The ultimate owner typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids, cross-shareholding and so on. It's difficult for the outside shareholder to find what the ultimate owner wants to do through the complex ownership structure. The agency problem between the ultimate owner and the outside owner is even worse. Our research examines the effect of the character of ownership structure, especially the divergence of cash flow rights and voting rights, on earnings management.This study base on the data of china's family controlled listed corporations during 2002-2004, we set a theory model to analysis the relationship between the divergence of cash flow rights and voting rights and earnings management, then practice an empirical test to prove the theory hypothesis. We find that earnings management is significant associated with the corporate ownership structure. Earnings management is positively associated with the divergence of the cash flow rights and voting rights. As the cash flow rights increase, earnings management decrease; as the voting rights increase, earnings management increase. This result exhibit that ultimate ownership structure play an important role in earnings management, the divergence of cash flow right and voting rights significant impact earnings management.