The untabulated results indicate the results are similar to those presented in Table 6 and Table 7.
6. Conclusions
Chinese listed firms with foreign ownership have increased since the restrictions on investing in China were loosened. When foreign investors become large shareholders, they may effectively monitor the managers in order to maintain the performance of the firms. Thus, managers may have less incentive to manipulate earnings. The earnings quality may increase. One of the objectives in this paper is to examine whether Chinese firms which foreign investors are one of ten largest shareholders have superior earnings quality. Besides, we investigate the relationship between board structure and earnings quality, including board size and foreign board of directors.
On the whole, the empirical results are consistent with our prediction that foreign
ownership can effectively improve earnings quality. We find that the earnings quality is high for firms with a large board. Despite the doubt about decrease in efficiency of communicating or coordinating in large board, it’s obvious that large board is related to better earnings quality. Contrary to our predictions, we find no evidence that foreign directors can improve the earnings quality.
There are several limitations to our study. First, we only use two proxies for earnings quality. Future studies can examine the impact of foreign investors on earnings quality by using different measurements. Second, due to data limitation, we only classify samples as firms with foreign ownership based on whether foreign investors are one of the ten largest shareholders. Third, we only focus on the impact of foreign investors on earnings quality. We suggest that future studies can examine the impact of foreign investors on investing or financial decisions such as dividend policy.
Despite these limitations, we believe that this study has several policy implications. First, the empirical results indicate that foreign-owned companies in China have better earnings quality than non-foreign-owned companies. We suggest that the Chinese government should encourage the participation of foreign investors.
Second, foreign investors can make use of transforming the board structure to improve earnings quality, such as appointment of foreign directors and independent directors. Third, we offer evidence that firms with foreign ownership have better earnings quality. Investors can consider the impact when they make investment decisions.
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