Propping through related party transactions

Ming Jian () and T. J. Wong ()
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Ming Jian: Nanyang Technological University
T. J. Wong: The Chinese University of Hong Kong

Review of Accounting Studies, 2010, vol. 15, issue 1, No 3, 70-105

Abstract: Abstract Based on a sample of Chinese listed firms from 1998 through 2002, this paper documents that listed firms prop up earnings by using abnormal related sales to their controlling owners. Such related sales propping is more prevalent among state-owned firms and in regions with weaker economic institutions. We also find that these abnormal related sales are not entirely accrual-based but can be cash-based as well, and they serve as a substitute rather than complement to accruals management for meeting earnings targets. Since these abnormal related sales can be cash-based, there is significant cash transfer via related lending from listed firms back to controlling owners after the propping. However, no cash transfer via related lending is found to be associated with accruals earnings management.

Keywords: Propping; Related party transactions; Corporate governance; Controlling shareholders; G3; M4 (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s11142-008-9081-4

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