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Bachelor thesis BSc Thesis Accounting

INTRODUCTIONSomemes the exercise of accounng discreon enables managers to manage prots byshi!ing the revenue or expenses of an accounng period to another accounng period.When this happens, it is reduces the total cost for the year under review and increases theprot; even when income is expected in the future, it may be included in the current yearnancial statements. When there is also a sign of loss in the future, sales of the current yearcan be delayed and included into the next statement. These acons can be referred to asearnings management. Earnings management is associated with the entrenchment e)ect(Weisbach 1988). According to agency theory, managers may take advantage of informaonopacity to make earnings manipulaon possible (Rodríguez-Pérez and Hemmen, 2010).While a large number of studies have invesgated earnings management in listed companiesin developed countries, focus has recently shi!ed to China. When we look at China, publicownership companies tends to have stronger incenves to manage earnings formanagement compensaon, while private ownership companies pay more a9enon to taxexpense savings (Carlos, 2008). In a study conducted in China by Chen, Lee, and Li (2008), itwas observed that due to the rigid rule-based accounng, the listed rms in china havelimited instruments for earnings management. The Chinese board of directors show somedi)erences with the developed world due to China’s concentrated ownership structure oflisted rms, and the ongoing strong polical and economic connecons between listed rmsand the Chinese government (Mancinelli and Ozkan, 2006). Since this divergence betweenChina and developed countries could mean that a larger board has control over the CEO, itraises the queson whether this also lowers the entrenchment e)ect.The research queson derived from this is:Does the board size of Chinese rms in@uence the earnings management of these rms?This queson is important in China because merit based pay is an alien concept under theeconomic system used prior to the economic reforms (Ding and Warner, 2001; Cooke, 2004).China is currently searching for new ways to balance the CEO’s reward and performance.When we look at the CEO pay–performance elascies in China for separate years between2006 and 2010, it suggests a strengthening of the link between performance and CEO pay(Bryson et al., 2014). This research could reveal unknown factors that a)ect the reportedperformance of the company. The result could then be used to make recommendaons forfuture public policy. For example, a more independent board may act to restrain ‘excessive’CEO pay (Boyd, 1994) and instead put focus to the link between CEO pay and the rm’sperformance. Core et al. (1999) expanded this research topic and has found that largeboards in developed countries are associated with excessive CEO pay. However, if we look atthe results of Firth (2007), we see a divergence between china and the developed countriesmenoned by Core. Firth found that large boards in China tends to constrain CEO pay.The hypotheses would be tested by making a comparison between the board size of acompany and the esmated management of earnings conducted by these companies. Thesample of this study consists of data of publicly held companies in de China. Date from allthe constuents of the SSE 50 index for the years 2014 to 2016 is taken for this study. Dataon the board’s size are collected from the CSMAR China Listed Firm’s Corporate GovernanceResearch Database. The earnings management is calculated by using the Jones model (Yu,2008). The nancial data to be used for this study is available from COMPUSTAT. Earnings managementCompanies may adjust their income, in accordance with GAAP, using periodic accruals.Publishers always perform raonally and in their own self-interest to maximize their wealth,even if they are to mislead investors. DuCharme et al. (2001) showed that the level of protmanagement is negavely related to solid performance. There is an extensive literature inaccounng and nance examining managers’ incenves and acons to manage earnings inthe United Sates. Only a few studies focus on earnings management in listed rms in China.Chen and Yuan (2004) and Yu et al. (2006) nd that China’s seasoned equity o)ering rmsengage in earnings management in order to meet the regulatory thresholds for a seasonedequity o)ering. When we invesgate China further, public ownership companies tends tohave stronger incenves to manage earnings for management compensaon, while privateownership companies pay more a9enon to tax expense savings (Carlos, 2008). In a studyconducted in China by Chen, Lee, and Li (2008), it was observed that due to the rigid rule-based accounng, the listed rms in china have limited instruments for earningsmanagement.Board sizeFinance literature has generally supported the proposion that decision making problemsincreasingly hurt rm performance as the number of directors on board increases (Yermack1996). Although agency theory is the predominant theory ulized in the research on boardsof directors, resource dependence theory also has signicant research in@uence in this area(Hillman et al., 2009). As larger boards are more likely to include directors with greateraccess and diversity in terms of outside recourses, experse, industry experience, educaonand even gender, rms are be9er o) with large boards (Ning et al. 2010). An importantcharacterisc of Chinese corporate governance is that the majority of listed companies areoriginal SOEs. SOEs used to have be9er access and greater resources compared to Non-SOEs(Peng and Luo, 2000)In order to win the compeon with Non-State-owned rms, SOEs have to seek out extraconnecons with the government. Chinese listed rms parcularly value connecons andadvice provided by directors. The top management of listed rms are generally policallyconnected and are reputed to possess a lack of management skills (Fan, Wong and Zhang,2007). Connecons play an important role all over the world, but Chinese culture includessome unique features. The personal, reciprocal and more long-term orientated aspects areextremely important in Chinese corporate governance (Yang, 2011).To decrease the in@uence of connecons, China tried to add more independent members inthe boardroom. This should decrease the power of the CEO. For example, a moreindependent board may act to restrain ‘excessive’ CEO pay (Boyd, 1994) and instead putfocus to the link between CEO pay and the rm’s performance. Core et al. (1999) expandedthis research topic and has found that large boards in developed countries are associatedwith excessive CEO pay. However, if we look at the results of Firth (2007), we see adivergence between china and the developed countries menoned by Core. The Chineseboard of directors show some di)erences with the developed world due to China’sconcentrated ownership structure of listed rms, and the ongoing strong polical andeconomic connecons between listed rms and the Chinese government (Mancinelli andOzkan, 2006). Firth found in his research that large boards in China tends to constrain CEOpay.HypotheseThe objecve of this study is to nd out whether the results that were found by Firth (2007)also holds for earnings management in china. The hypothesis is therefore: Firms that have alarger board will show less earnings management, and the rms with a smaller board sizewill show more earnings management.

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