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Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong Kong Firms

Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong... We document positive association between earnings management and insider selling after the fiscal year‐end for Hong Kong firms. This positive association is especially evident before the 1997 Asian Financial Crisis. Our findings suggest that Hong Kong executives manage reported earnings to maximize their private benefits from insider selling. Additionally, we find that a higher proportion of independent directors (INED) on corporate boards moderate the positive association between insider selling and earnings management. Stricter monitoring of earnings management by INED is especially evident when no member of the family with majority ownership is present on corporate boards as a director. This suggests that the presence of family members with majority ownership on corporate boards significantly reduces INED's monitoring effectiveness. Our findings suggest that strict regulations are needed to control insider trading, and independence of corporate boards is important for monitoring of earnings management associated with insider trading. Furthermore, appointment of family members with majority shareholdings should be avoided to enhance independence and to monitor effectiveness of corporate boards. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of International Financial Management & Accounting Wiley

Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong Kong Firms

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References (37)

Publisher
Wiley
Copyright
Copyright © 2007 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0954-1314
eISSN
1467-646X
DOI
10.1111/j.1467-646X.2007.01012.x
Publisher site
See Article on Publisher Site

Abstract

We document positive association between earnings management and insider selling after the fiscal year‐end for Hong Kong firms. This positive association is especially evident before the 1997 Asian Financial Crisis. Our findings suggest that Hong Kong executives manage reported earnings to maximize their private benefits from insider selling. Additionally, we find that a higher proportion of independent directors (INED) on corporate boards moderate the positive association between insider selling and earnings management. Stricter monitoring of earnings management by INED is especially evident when no member of the family with majority ownership is present on corporate boards as a director. This suggests that the presence of family members with majority ownership on corporate boards significantly reduces INED's monitoring effectiveness. Our findings suggest that strict regulations are needed to control insider trading, and independence of corporate boards is important for monitoring of earnings management associated with insider trading. Furthermore, appointment of family members with majority shareholdings should be avoided to enhance independence and to monitor effectiveness of corporate boards.

Journal

Journal of International Financial Management & AccountingWiley

Published: Sep 1, 2007

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