Research on Block Holders, Investor Relations and Earnings Management: Evidence from Chinese Listed Companies

The listed companies in China are strongly controlled by large shareholders, and they have strong incentive to manage earnings upward by altering discretionary accruals to gain the rights issues and raise stock prices. This paper takes 397 2005-year firms in Shenzhen as sample, based on the modified Jones model, studies the association among discretionary accruals, the control of largest shareholder and investor relations. Results suggest that largest shareholder and discretionary accruals significantly positive correlated; higher level of investor relations, lower discretionary accruals; the level of investor relations can moderate the power of the block holders to expropriate outsider investors, and it can reduce the positive relations between equity concentration and discretionary accruals. For listed company of the different nature of the ultimate controller, its earnings management justified by the level of the investor relations impact is different. After a series of robust tests, the conclusions remained stability.