Controlling Shareholders Over-Appointing of Directors and Earnings Management

Lei Zhou and Feng Wei

Emerging Markets Finance and Trade, 2025, vol. 61, issue 15, 4704-4726

Abstract: Academics, financiers and regulators have long sought to understand what drives the quality of financial reporting, because higher earnings management tends to be associated with lower firm value. However, prior literature on corporate governance has mainly focused on the effect of agency conflicts between managers and shareholders on earnings management. This paper departs from the prior literature and examines the relationship between controlling shareholders’ over-appointing of directors and earnings management. Using a large sample of Chinese non-financial listed firms from 2008 to 2021, we find that controlling shareholders’ over-appointing of directors is associated with higher earnings management. Mechanism analyses show that as controlling shareholders’ over-appointing of directors and earnings management increase, the tunneling activities proxied by funds occupation and related party transactions also increase, and the results are consistent with the tunneling hypothesis. Further tests show that the increase in earnings management caused by controlling shareholders’ over-appointing of directors has a significantly positive effect on stock price crash risk, and a negative effect on firm value.

Date: 2025
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DOI: 10.1080/1540496X.2025.2519415

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