Are State-Owned Enterprises Equally Reliable Information Suppliers? An Examination of the Impacts of State Ownership on Earnings Management Strategies of Chinese Enterprises

Abstract

Earnings management refers to a company’s use of either accounting techniques (accrual-based earnings management) or real economic activities (real earnings management) to manipulate reported earnings and mislead users of financial information. It often indicates serious ethical issues in a company’s management, which will affect the reliability and sustainability of a firm’s services in the supply chain. Using A-share listed Chinese firms on the Shanghai and Shenzhen Stock Exchanges, we investigated the impacts of state ownership on management’s decision to select real or accrual-based earnings management strategies. We found that state-owned enterprises (SOEs) tend to favor real earnings management over accrual-based earnings management more than non-SOEs. Furthermore, those SOEs that are controlled by the central government engage in real earnings management more often than those controlled by local governments. We also examined whether media attention and litigation interact with state ownership to affect earnings management. We found that SOEs, especially central SOEs, with a high level of media attention or an incidence of litigation, are more likely to use real earnings management. Our research can assist firms in making better decisions in selecting business partners and service suppliers in an emerging market through the assessment of management integrity.