Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong Kong Firms

31 Pages Posted: 14 Sep 2007

See all articles by Bikki Jaggi

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Judy S.L. Tsui

Hong Kong Polytechnic University - School of Accounting and Finance

Abstract

We document positive association between earnings management and insider selling after the fiscal year-end for Hong Kong firms. This positive association is especially evident before the 1997 Asian Financial Crisis. Our findings suggest that Hong Kong executives manage reported earnings to maximize their private benefits from insider selling. Additionally, we find that a higher proportion of independent directors (INED) on corporate boards moderate the positive association between insider selling and earnings management. Stricter monitoring of earnings management by INED is especially evident when no member of the family with majority ownership is present on corporate boards as a director. This suggests that the presence of family members with majority ownership on corporate boards significantly reduces INED's monitoring effectiveness. Our findings suggest that strict regulations are needed to control insider trading, and independence of corporate boards is important for monitoring of earnings management associated with insider trading. Furthermore, appointment of family members with majority shareholdings should be avoided to enhance independence and to monitor effectiveness of corporate boards.

Suggested Citation

Jaggi, Bikki and Tsui, Judy S.L., Insider Trading, Earnings Management and Corporate Governance: Empirical Evidence Based on Hong Kong Firms. Journal of International Financial Management & Accounting, Vol. 18, No. 3, pp. 192-222, Autumn 2007, Available at SSRN: https://ssrn.com/abstract=1014195 or http://dx.doi.org/10.1111/j.1467-646X.2007.01012.x

Bikki Jaggi (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100B Rockafeller Road
Piscataway, NJ 08854
United States

Judy S.L. Tsui

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
852 2766 7828 (Phone)
852 2334 7830 (Fax)

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