Pyramidal Shareholding Structure And Earnings Management

Corporate governance mechanism is regarded as a method of restraining earnings management. Many specialists focused on this area. Their studies indicate that ownership structure has significant effect on earnings management. Most of the studies are studied under direct ownership structure. However, many studies indicate that many 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. So our research examines the effect of the character of ownership structure, especially separation quantum of cash-flow rights and control rights on earnings management.This study bases on the data of China's family controlled listed corporations during 2004-2006, we set a model to analysis the relationship between the separation quantum of cash-flow rights and control rights and earnings management. Then we 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 separation quantum of the cash-flow rights and control rights. As the cash-flow rights increase, earnings management increases. As the control rights increase, earnings management increases. This result exhibits that pyramidal ownership structure plays an important role in earnings management, and the separation quantum of cash-flow rights and control rights impacts the earnings management.