Earnings Management, Politically Connected CEOs, and Politically Connected Independent Board Members: Evidence from China

Abstract

This study investigates whether Chinese firms’ earnings management behaviors vary systematically with politically connected CEOs and studies the association between Chinese firms’ earnings management behaviors and the presence of politically connected independent board members. We find that firms with politically connected CEOs engage in less real earnings management, probably because their political connections make raising capital easier and reduce incentives for earnings management. However, this relationship is weaker in State-Owned Enterprises (SOEs) than in non-SOEs. In addition, we find that politically connected independent board members have significant negative impacts on real earnings management in non-SOEs, suggesting the independent directors with political ties could mitigate real earnings management.