speaker time

Accounting Seminar2019-17

Topic:Earnings Management via Not-wholly-owned Subsidiaries

Speaker:Frank Zhang,Yale University

Time:Wednesday, Dec 25th, 10:00-11:30 a.m

Place:Room 217, Guanghua Building 2


We explore a new mechanism of earnings management whereby a parent company shifts income from not-wholly-owned subsidiaries to itself to avoid losses. Consolidated net income attributable to the parent company increases if earnings are shifted from not-wholly-owned subsidiaries to the parent, as the parent company enjoys the full amount of earnings shifted rather than sharing earnings with minority investors. In general, net income and noncontrolling interest in subsidiary earnings exhibit a strong positive correlation, suggesting that a firm’s earnings performance tends to co-move with its subsidiaries’ earnings. However, this positive relation turns significantly negative for firms just meeting or beating zero earnings, indicating that firms opportunistically decrease earnings of not-wholly-owned subsidiaries to manage consolidated net income to avoid losses. Income shifting from subsidiaries to the parent firm is mainly driven by firms with a very large percentage of noncontrolling ownership. In addition, related-party transactions and concurrent appointment of a parent’ s top management member to subsidiaries’ management team play a complementary role in facilitating such income shifting. Overall, our evidence not only demonstrates a new mechanism of earnings management via not-wholly-owned subsidiaries, but also highlights the negative consequences to minority investors of income shifting from subsidiaries to the publicly listed company.


Frank Zhang is a professor at Yale University. His research focuses on empirical capital market researches, including stock anomalies, fundamental analysis, investor and analyst behavior, management incentives, and corporate financial reporting. He has published about 20 papers in leading accounting and finance journals, such as The Accounting Review, Journal of Accounting Research, Review of Accounting Studies, Journal of Finance, and Review of Financial Studies. He is currently a member of the FARS Steering Boad and an Associate Editor of Management Science. He has a PhD from the University of Chicago.

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