The Association between Ownership Structure and Managers’ Accounting Discretion in China: Evidence with State and Legal Person Ownership

This paper examines whether government and legal person ownership affected managers’ accounting discretion in China during the period 2000 to 2006. We also examine whether managers’ accounting discretion decreased after the introduction of the Code of Corporate Governance for Listed Companies(CCG hereafter) in 2002. Using total accruals and discretionary accruals as proxies for measuring managers’ accounting discretion, we find that the proportions of state shares and legal person shares are positively associated with managers’ accounting discretion. This result may suggest that these shareholders do not effectively play their roles in monitoring managers’accounting discretion or have incentives to influence management. Another interesting finding is that, after the introduction of the Code of Corporate Governance of 2002(CCG), discretionary accruals increased, while total accruals decreased. This study adds to academic literature on corporate governance by providing evidence that government can play an important role in monitoring managers’ accounting discretion. And this study has a contribution of improving multinational portfolio managers’ and direct investors’ understanding over financial reporting by examining one of important features of corporate governance(i.e., ownership structure) and earnings management in China.