State Ownership and Earnings Management: Evidence from the Split Share Structure Reform in China

Abstract

Studies on state ownership often involve endogeneity issues, such as a lack of variation in state ownership status and vastly different firm characteristics between state-owned enterprises and private firms. By using an exogenous regulatory reform, the split share structure reform in China, this paper examines the effect of state ownership through privatization, which mitigates the impact of endogeneity issues. The paper finds that privatized firms engaged more in earnings management, both accruals and real earnings management, after privatization. The results of the robustness test explain that this is partially due to external financing needs, after the loss of the benefits provided to state-owned enterprises. The result is consistent when a matched sample based on the propensity score matching is used. The paper contributes to the literature by reducing the endogeneity issues commonly present in state ownership studies and provides evidence on the impact of the loss of state ownership in China, where the capital market is considered less developed.