The Relationship Between Affiliated Management And Subsidiary’s Performance Manipulation Behaviors

Executives of parent company holding concurrent posts in subsidiary (hereinafter referred to as affiliated management) is a common means to control subsidiary which has been studied by scholars. In developed countries which have relatively sound laws and regulations, the corporate governance effect of affiliated management is remarkable. In China, affiliated management is widespread while there is no unified conclusion about the implications of this control means. From the perspective of the parent company, affiliated management is an effective means to manage subsidiary, while some scholars and minority shareholders think affiliated management may not play a supervisory role and even become a tunnel for the parent company to encroach on minority shareholders’ interests.In order to protect the interests of minority shareholders, Chinese supervisory departments haven’t deregulated affiliated management. Although restrictive laws and regulations were enacted one after another, the actual effect is limited since there is no corresponding punishment. Instead of being reduced, affiliated management has the potential of being intensified and multifarious.It is possible that managers of subsidiary manipulate performance for some purpose, namely performance manipulation behaviors, mainly including earnings management and related party transaction in this paper. On the one hand, agency problem is serious in corporate group since it has many subsidiaries and complex control chains. Managers of subsidiary are able to manipulate performance to maximize personal interests at the expense of damaging the interests of group because of information asymmetry caused by regional difference, namely earnings management. On the other hand, corporate group may use related party transaction to support poorly performing subsidiary at the expense of well-performing subsidiary in order to share risk, in particular, at times of financial difficulties. This kind of manipulation may enhance the interests of group at the expense of the interests of minority shareholders of the well-performing subsidiary, namely related party transaction.This paper tries to collect and use the data of Chinese listed companies to research the relationship between affiliated management and subsidiary’s performance manipulation behaviors, adding to previous research about the influence of affiliated management in China. The empirical evidence shows:(1) high proportion of holding concurrent posts helps to restrain subsidiary’s earnings management; holding a concurrent post of CEO in subsidiary by executive of parent company has little effect on subsidiary’s earnings management; high proportion of holding concurrent posts by vice general managers of parent company helps to restrain subsidiary’s earnings management; holding a concurrent post in subsidiary by CFO of parent company helps to restrain subsidiary’s earnings management; vice general managers show significantly greater effect on subsidiary’s earnings management than CFO. (2) high proportion of holding concurrent posts promotes subsidiary’s related party transaction; holding a concurrent post of CEO in subsidiary by executive of parent company helps to restrain subsidiary’s related party transaction; high proportion of holding concurrent posts by vice general managers of parent company has little effect on subsidiary’s related party transaction; holding a concurrent post in subsidiary by CFO of parent company promotes subsidiary’s related party transaction.