Earnings Management of Chinese Listed Multinational Corporations

• Published date: 01 November 2023
• Author: Xingyu Lu,Tong Qi,Wenjing Xie
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/cwe.12513

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 179–206, Vol. 31, No. 6, 2023179

Earnings Management of Chinese Listed

Multinational Corporations

Xingyu Lu, Tong Qi, Wenjing Xie*

Abstract

This study evaluates the quality of accounting information provided by Chinese

multinational corporations (MNCs) in relation to the issue of earnings management.

Using a combined dataset of outward foreign direct investment and financial

statements by Chinese firms publicly listed on A-share markets between 2012 and

2017, we investigate whether Chinese MNCs are more inclined to manage earnings.

We discover that these fi rms exhibited signifi cant earnings management behavior and

typically adjusted their earnings downward. We demonstrate that these effects were

more pronounced among private MNCs than state-owned fi rms, and in host countries

with weaker institutional quality. Further research reveals that after delaying the

confi rmation of current earnings, Chinese MNCs received higher government subsidies,

and this pattern was particularly prevalent among private MNCs. We fi nd no evidence

that Chinese MNCs manipulated earnings to avoid paying taxes.

Keywords: earnings management, government subsidies, multinational corporations,

outward foreign direct investment

JEL codes: F23, G34, M41

I. Introduction

With the development of the Chinese capital market, the domestic supervision of

listed companies is becoming stronger. The information transparency of Chinese listed

companies has increased because of government enforcement and external monitoring.

*Xingyu Lu, PhD Candidate, College of Business, Shanghai University of Finance and Economics, China.

Email: shangcai17lxy@163.com; Tong Qi (corresponding author), Lecturer, School of Economics and

Management, East China Normal University, China. Email: tqi@fem.ecnu.edu.cn; Wenjing Xie, Associate

Professor, School of Economics and Finance, Shanghai International Studies University, China. Email:

leoxie818@shisu.edu.cn. The authors would like to thank the editor and anonymous referees for helpful

comments and suggestions.This research was supported fi nancially by the National Natural Science Foundation

of China (Nos. 72203061, 72303157, and 72173082), the Ministry of Education Project of Key Research

Institute of Humanities and Social Sciences at Universities in China (No. 22JJD790011), and the Fundamental

Research Funds for the Central Universities (No. 2021ECNU-HLYT033).

Xingyu Lu et al. / 179–206, Vol. 31, No. 6, 2023

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

180

However, cross-border supervision is still insufficient. It is challenging for regulatory

agencies to recognize the misconduct of multinational corporations (MNCs), especially

their overseas activities, because of the complexity of cross-border transactions and the

discrepancies between domestic and foreign accounting standards. Although little has

changed, there was a fi erce debate over whether to implement extraterritorial jurisdiction

to improve cross-border supervision, following the accusations of accounting fraud

against Luckin Coff ee in 2020.1 The severe information asymmetry between headquarters

and overseas subsidiaries makes it possible for parent firms to manage earnings

when integrating the accounting data, and the absence of international regulatory

collaboration and effective monitoring creates opportunities for firms to manipulate

financial statements through cross-border business (Bartelsman and Beetsma, 2003;

Kim et al., 2016).2 The market value of Chinese listed MNCs accounts for more than

68 percent of all listed fi rms between 2012 and 2017, so their improper fi nancial behavior

would have a significant impact on the Chinese capital market.3 Knowing the quality

of accounting information of the firms with overseas business is essential to enable

policymakers and other associated parties to regulate the operation of fi rms eff ectively.

This study is designed to evaluate the degree of earnings management of Chinese

MNCs. In our empirical analysis, we compare the quality of accounting information between

MNCs (i.e., firms with outward foreign direct investment (OFDI) deals), and non-MNCs

(i.e., those without OFDI), using a merged dataset of Chinese listed firms. The financial

information is from the China Stock Market & Accounting Research (CSMAR) database

and their OFDI transaction data are from the fDi Markets database and the Securities Data

Company (SDC) Platinum database. Our results show a significant negative association

between OFDI and fi rm discretionary accruals, which suggests that MNCs in China have

been more likely to delay their recognition of accrual items. Ceteris paribus, MNCs in China

decreased the average level of discretionary accruals by 3.02 percent more than non-MNCs

during the period investigated. This fi nding is robust when adding additional fi xed eff ects,

1In August 2022, China and the US reached an agreement on the inspection of the audit drafts of Chinese fi rms

listed on the US exchanges. The Chinese government still prohibits foreign regulators from accessing the

accounting documents of these Chinese fi rms for the sake of national security.

2For example, the Shandong Yabo Technology Company Limited, overstated its revenues by about RMB580 million

and profi ts by about RMB260 million, which accounted for nearly 73 percent of the total profi ts. This was

done by fabricating overseas engineering projects and transactions from 2015 to September 2016.

3Panel A of Appendix Table A1 reports detailed information on market share. The revenue and total assets

contributed by the MNCs’ foreign subsidiaries to their parent companies are also shown in Panel B of Appendix

Table A1. During the sample period, foreign subsidiaries accounted for 3 percent to 16 percent of total revenue,

and foreign subsidiaries occupied approximately 5 percent of total asset on average. These figures may be

underestimated, because they excluded the sample of foreign subsidiaries with missing information.