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Article: Performance Commitments of Controlling Shareholders and Earnings Management

TitlePerformance Commitments of Controlling Shareholders and Earnings Management
Authors
Issue Date2015
Citation
Contemporary Accounting Research, 2015, v. 32, n. 3, p. 1099-1127 How to Cite?
Abstract© 2015 The Canadian Academic Accounting Association.Since the Split Share Structure Reform took effect in China in 2005, holders of nontradable shares (controlling shareholders) have had to negotiate with holders of tradable shares (minority shareholders) to gain the liquidity right. In a typical deal reached, the controlling shareholder agrees to pay share compensation to minority shareholders and, in many cases, also pledges to meet a specific firm performance target (performance commitments). Using this reform setting, we examine the impact of performance commitments on earnings management behavior, and find the following results. First, less profitable firms have greater incentives to make performance commitments that help to reduce the share compensation that controlling shareholders have to pay. Second, firms entering into such commitments engage in earnings management to meet the promised performance target when actual performance falls short, and firms facing greater default costs tend to manage earnings more aggressively. Third, depending on the performance metric stipulated in the commitment contract, firms employ varying methods to manage earnings. We also find that firms that rely on earnings management to meet their performance targets display inferior performance in the postcommitment years relative to firms that do not. Overall, our evidence is consistent with performance commitment contracts (with costly defaults) between a firm's controlling and minority shareholders causing incentives for earnings management.
Persistent Identifierhttp://hdl.handle.net/10722/233858
ISSN
2015 Impact Factor: 1.782
2015 SCImago Journal Rankings: 2.594

 

DC FieldValueLanguage
dc.contributor.authorHou, Qingchuan-
dc.contributor.authorJin, Qinglu-
dc.contributor.authorYang, Rong-
dc.contributor.authorYuan, Hongqi-
dc.contributor.authorZhang, Guochang-
dc.date.accessioned2016-09-27T07:21:49Z-
dc.date.available2016-09-27T07:21:49Z-
dc.date.issued2015-
dc.identifier.citationContemporary Accounting Research, 2015, v. 32, n. 3, p. 1099-1127-
dc.identifier.issn0823-9150-
dc.identifier.urihttp://hdl.handle.net/10722/233858-
dc.description.abstract© 2015 The Canadian Academic Accounting Association.Since the Split Share Structure Reform took effect in China in 2005, holders of nontradable shares (controlling shareholders) have had to negotiate with holders of tradable shares (minority shareholders) to gain the liquidity right. In a typical deal reached, the controlling shareholder agrees to pay share compensation to minority shareholders and, in many cases, also pledges to meet a specific firm performance target (performance commitments). Using this reform setting, we examine the impact of performance commitments on earnings management behavior, and find the following results. First, less profitable firms have greater incentives to make performance commitments that help to reduce the share compensation that controlling shareholders have to pay. Second, firms entering into such commitments engage in earnings management to meet the promised performance target when actual performance falls short, and firms facing greater default costs tend to manage earnings more aggressively. Third, depending on the performance metric stipulated in the commitment contract, firms employ varying methods to manage earnings. We also find that firms that rely on earnings management to meet their performance targets display inferior performance in the postcommitment years relative to firms that do not. Overall, our evidence is consistent with performance commitment contracts (with costly defaults) between a firm's controlling and minority shareholders causing incentives for earnings management.-
dc.languageeng-
dc.relation.ispartofContemporary Accounting Research-
dc.titlePerformance Commitments of Controlling Shareholders and Earnings Management-
dc.typeArticle-
dc.description.natureLink_to_subscribed_fulltext-
dc.identifier.doi10.1111/1911-3846.12111-
dc.identifier.scopuseid_2-s2.0-84941097304-
dc.identifier.volume32-
dc.identifier.issue3-
dc.identifier.spage1099-
dc.identifier.epage1127-
dc.identifier.eissn1911-3846-

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