The Effects of Capital Structure on Earnings Management: Empirical Evidence from China

We examine the relationship between capital structure and earnings management in this study, with reference to the Chinese capital market. We measure the impacts of debts, the proportion of controlling shareholders´, executives and external large shareholders. Analyzing Chinese companies listed from 2003 to 2007, we establish a link between capital structure and earnings management practices. The evidence shows that the equity proportion of controlling shareholders has an inverted U shaped relationship with earnings management, and the debt ratio has a strong positive relationship with earnings management. Also the equity proportion of executives has a weak positive relationship with earnings management. The result shows that there is a weak negative relationship between external majority shareholders´ share and earnings management. Some suggestions are promoted according to the result.