State ownership and abnormal accruals in highly-valued firms: Evidence from China

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Journal of Contemporary Accounting and Economics


We examine how state ownership affects Chinese firms’ abnormal accruals during a period of high valuation. We find the magnitude of abnormal accruals first increases for up to three years of high valuation, and then reduces after the fourth year. We also find that managers turn to using abnormal real transactions after four consecutive years of high valuation. Next, we examine whether the degree of abnormal accruals in highly-valued firms differs between state-owned enterprises (SOEs) and non-NSOEs. Supporting the view that SOE managers have less incentive to sustain high stock prices, we find evidence that highly-valued SOEs have significantly lower levels of abnormal accruals than highly-valued NSOEs during the period of high valuation. Our findings contribute to the literature on the cross-sectional variation in the relation between managers’ pressure to sustain high stock prices and their accounting choices in firms with different ownership structures.

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