Empirical Study On Earnings Management Through Related Party Transaction In Chinese Listed Companies

The problem of related party transaction accompanies the development of Chinese stock market. It has natural relationship with the emerging China capital market and the enterprises reform. The faultiness of internal and external condition of Chinese companies are conducive to the related party transaction. Chinese listed companies' related party transaction are quite common and the amount is huge. Anecdotal evidence indicates that the listed companies' inside condition and outside condition in China fails to constrain controlling shareholders from manipulating earnings and expropriating minority shareholders through related party transaction. A lot of unfair related party transaction distort the resource allocation function of the capital market and mislead the investors.Despite all the media attention, there is very little large sample evidence of related party transaction in empirical study because of the difficulty in collecting data and the complexity of the transaction itself. This paper attempts to explore in this field.The construction of this paper is as following: first, based on the review of correlated literature, the author clarifies the definitions of related party transactions and earnings management. Secondly, point out the motivation of the listed companies to make earning management using related party transactions by reviewing course of supervision to related party transactions in china. In empirical study, all A-share, non-financial listed companies with the standard auditing opinions by CPA are chosen as the research sample from Shanghai and Shenzhen stock market, which disclose the important related transactions in financial statement in 2005. Empirical study test whether or not the sample make earning management through related transactions and point out the motivation: evading deficit, controlled by controlling shareholders and ameliorating asset-liability ratio. Then this paper draws conclusions as follows: there are the phenomena of earning management in the research sample; there are significant evidence indicate that the listed companies which want to evade deficit and which existing controlling shareholders have incentive to make earning management using related transaction; but no evidence show that the listed companies improve the asset-liability ratio.Research results in this paper imply that solving the problem of related party transactions should improve the inside and outside condition, make the listed company totally independent, not just the appendant to other firms or departments.