Firm-bank common ownership and earnings management: Evidence from China

Abstract

Based on a unique dataset of the equity relations between Chinese listed companies and the banks that provide them with loans, this paper empirically examines the impact and mechanisms of firm-bank common ownership on corporate earnings management. We find that firm-bank common ownership significantly reduces corporate earnings management behavior. Next, we use instrumental variable regression, the PSM method, along with a series of supplementary analyses to validate the robustness of the results. In terms of the mechanism, we find that firm-bank common ownership significantly improves firms' loan accessibility, and thus suppresses the incentive for earnings management. Our research broadens existing studies on the impact of firm-bank common ownership and provides new insights into the determinants of corporate earnings management.