Appendix: Definition of variables This appendix reports the definition and acronym of variables and expected relations with earnings management measures. Variable Acronym Expected relation Definition Total accruals ACC The difference between net income and cash flow from operations divided by asset Discretionary accruals DACC The residual of Jones (1991) model Politically connected CEO PCEO - A dummy variable that equals 1 if the chairman of the board is politically connected CEO Gender CEO Gender + A dummy variable that equals 1 if the chairman of the board is male CEO Age CEO Age - Natural log of the age of the chairman of the CEO Duality CEO Duality + A dummy variable that takes the value 1 if the chairman of the board and the general manager is the same person Firm Size Firm Size + Natural log of total assets Leverage Leverage + Total liabilities to total assets Board Size Board Size +/- Natural log of the total number of directors on board Board Independence Board Independence - The number of independent director to the number of directors on board Multiple legal environment HBshare - A dummy variable that equals 1 if firm also issue H share or B share Largest shareholder ownership Concentration + Percentage of shares held by the largest shareholder Other controlling shareholders ownership SHARE2_10 - Sum of percentage of shares held by the 2nd to 10th shareholders Seasoned Equity Offering SEO + A dummy variable that equals 1 if the observation year is any three years prior to a SEO
Table 5: Political connection and earnings management This table reports the estimates of the following regression model for two measures of earnings management. ACC/DACC = α + β1PCEO + Gender + β3CEO Age + β4CEO Duality + β5Firm Size + β6Leverage + β7 Board Size + β8Board Independence + β9HBshare + β10Concentration + β11Largest 2-10 + β12 SEO + ε The description of the variables is summarized in the Appendix. *, ** or *** indicates significance at the 90%, 95% or 99% confidence levels, respectively. Expected Relation (1)ACC (2)DACC PCEO - -0.0051** -0.1101*** CEO Gender + -0.0005 -0.1416*** CEO Age - -0.0097* -0.0906** CEO Duality + -0.0004 0.0147 Firm Size + 0.0062*** -0.0516** Leverage + -0.0730*** 0.0708** Board Size +/- -0.0058 -0.1209*** Board Independence - -0.0028 0.0406 HBshare - -0.0106*** -0.0057 Concentration + 0.0208*** 0.1564*** Largest 2-10 - 0.0377*** 0.1815*** SEO + 0.0147*** 0.0215 Concept Yes Yes Year effects Yes Yes Industry fixed effects Yes Yes # of observations 11117 11117 Overall R2 0.0475 0.0278
6: Political connection and earnings management, lagged value approach This table reports the estimates of the following regression model for two measures of earnings management. ACC /DACC = α + β1PCEOt-1 + β2CEO Gender t-1 + β3CEO Age t-1 + β4CEO Duality t-1 + β5Firm Size t-1 + β6Leverage t-1 + β7 Board Size t-1 + β8Board Independence t-1 + β9HBshare t-1 + β10Concentration t-1 + β11Largest 2-10 t-1 + β12 SEO t-1 + ε The description of the variables is summarized in the Appendix. *, ** or *** indicates significance at the 90%, 95% or 99% confidence levels, respectively Expected Relation (1)ACC (2)DACC PCEOt-1 - -0.0045** -0.0986*** CEO Gender t-1 + 0.0010 -0.1138*** CEO Age t-1 - -0.0104* -0.1041** CEO Duality t-1 + 0.0000 0.0017 Firm Size t-1 + 0.0014 -0.0644*** Leverage t-1 + -0.0520*** 0.1051*** Board Size t-1 +/- -0.0045 -0.1263*** Board Independence - 0.0008 0.0579* HBshare t-1 - -0.0036 0.0104 Concentration t-1 + 0.0299*** 0.0758 Largest 2-10 t-1 - 0.0362*** 0.0884 SEO + 0.0184*** 0.0123 Concept Yes Yes Year fixed effects Yes Yes Industry fixed effects Yes Yes # of observations 9348 9348 Overall R2 0.0343 0.0337