Market Environment, Ownership Concentration And Earnings Management

As the accounting behavior of alienation, Earnings management used by listedcompanies in China’s capital market is common. The existing studies always explore therelationship between corporate governance and earnings management from the internalperspective. Especially during the study on shareholding structure, much more studiesfocused on the nature of equity than on ownership concentration. Takes the listedmanufacturing industry companies for example, the concentration of shareholding of theChinese listed companies is high, the average level of the proportion of top fiveshareholders is much more than50%, the high concentration of shareholding becomesone of the major characteristics of China’s corporate governance. Exploring therelationship between ownership concentration and earnings management is important toenrich the research theory of earnings management and to control the earningsmanagement behavior of listed companies. As a choice of the listed company underspecial market environment, earnings management is inevitably affected by the externalenvironment factors, such as legal environment, government intervention and marketdevelopment. In addition, as an important part of corporate governance structure,ownership concentration is also influenced by the market environment. Combining withthe situation of China’s manufacturing industry listed companies, this paper focused onthe external market environment and studies the influence of concentration of ownership,market development on Earnings Management through theoretical analysis and empiricalmethod．This paper uses contract theory, principal—agent theory and asymmetric informationtheory to tell that the major shareholders of the listed companies with high concentrationof ownership will use earnings management to occupy the interests of minorityshareholders. Based on the above theoretical analysis and combined with the externalenvironment, this article proposes three hypotheses on the relationships between marketenvironment, ownership concentration and earnings management.This paper takes the empirical data of the listed manufacturing industry companiesbetween2003and2007as a sample, establishes the regression model to verify the abovehypotheses. The study finds that, the higher the level of the market, the higher the levelof earnings management. In the company with low level of ownership concentration, therelationship between ownership concentration and earnings management is not remarkable, just only in the company with high level of ownership concentration, thepositive correlation between ownership concentration and earnings management isremarkable. This further empirical study tells that, in the company with high level ofownership concentration, the market environment will increase the positive correlationbetween ownership concentration and earnings management.