Merchant gang governance and earnings management

Abstract

This study integrates the multilateral punishment mechanism theory with the characteristics of Chinese society—”acquaintance,” “face,” and “relationship”—to analyze and test the governance mechanism of merchant gangs on earnings management for the first time. Findings reveal that (1) merchant gangs significantly reduce earnings management in Chinese listed companies, holding after various robustness checks; (2) companies more influenced by merchant gang governance face harsher multilateral punishments upon exposure of financial misconduct, with more complete conditions strengthening this effect; (3) merchant gangs have a stronger governance impact on firms with native management, and formal institutions enhance their governance role. This research provides empirical evidence for the multilateral punishment mechanism theory and contributes to understanding merchant gang governance in China.

Keywords

• Merchant gang governance
• earnings management
• multilateral punishment mechanism
• formal institutions