Earnings management and agency costs: Is China different?

In this article, we investigate the link between agency costs (AC) and earnings management (EM) in China. We find a significant and positive relationship between AC and EM based on the static model that suggests opportunistic EM in China. However, we find an insignificant relationship between AC and EM when we use the dynamic model that takes into account the endogeneity issue. Therefore, our results provide further support to the growing literature on the concerns of endogeneity issues in corporate governance studies, since failing to take these into account can lead to spurious results.