Review of Accounting Studies

, Volume 15, Issue 1, pp 70–105

Propping through related party transactions


DOI: 10.1007/s11142-008-9081-4

Cite this article as:
Jian, M. & Wong, T.J. Rev Account Stud (2010) 15: 70. doi:10.1007/s11142-008-9081-4


Based on a sample of Chinese listed firms from 1998 through 2002, this paper documents that listed firms prop up earnings by using abnormal related sales to their controlling owners. Such related sales propping is more prevalent among state-owned firms and in regions with weaker economic institutions. We also find that these abnormal related sales are not entirely accrual-based but can be cash-based as well, and they serve as a substitute rather than complement to accruals management for meeting earnings targets. Since these abnormal related sales can be cash-based, there is significant cash transfer via related lending from listed firms back to controlling owners after the propping. However, no cash transfer via related lending is found to be associated with accruals earnings management.


ProppingRelated party transactionsCorporate governanceControlling shareholders

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© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Division of Accounting, Nanyang Business SchoolNanyang Technological UniversitySingaporeSingapore
  2. 2.School of Accountancy, Faculty of Business AdministrationThe Chinese University of Hong KongShatinHong Kong