Supervision of Board of Directors, Management Compensations and Earnings Management: The Empirical Evidences from China

The paper focuses on the relationship between the boards of directors, the management compensation incentives and earnings management in China. We take the discretionary total accruals calculated by using the cross-sectional adaptation of the modified Jones model as the proxies of earnings management; and then examine the relationship between the management compensations, the supervision of the board of directors and earnings management. After controlled the firm size and debt levels, we demonstrate that the compensation incentives is one the most basic motivations of earnings management in China. At the same time we also find that the board of directors does not hold a significant role on constraining and monitoring the earnings management under the current Chinese capital market environment, although we find the larger boards are more possibly to be an efficient monitor for earnings management.