The CPC party organization in privately controlled listed companies and earnings management

Abstract

This paper studies the real effect of the party organization of Communist Party of China (hereafter, CPCPO) on the privately controlled listed companies’ governance from the perspective of earnings management. We find a significantly negative relationship between the party organisation activities and earnings management. The possible mechanisms are to encourage controllers of those firms to participate in the activities of CPCPO and even serve as the secretaries, and to make directors whom are CPC party member enter audit committee. Furthermore, this relationship is more pronounced when the chairman or CEO is a CPC member, has political connections, and when the time is politically sensitive period. The relationship is also more pronounced in companies with higher agency costs, weaker information environments, and greater financing constraints. Different from previous literature focusing on the role of CPCPO in state-owned enterprises, this paper explores the governance role of CPCPO in privately controlled firms.