The Agency Problem and the Moderating Role of Culturally-Based Management Style on Chinese Managers’ Discretionary Accruals

Upon completion of overseas acquisitions, Western firms typically hire Chinese locals or expatriates to run their Chinese operations. This is an important consideration because a Western executive’s managerial style may impact Chinese employee behavior differently than a Chinese executive’s managerial style. Utilizing an experiment with Chinese managers as participants, we examine the effect of the agency problem (when both an incentive and opportunity to act in line with one’s self-interest are present) on Chinese managers’ discretionary accrual decisions, as well as the role that their executives’ culturally-based management style (Eastern versus Western) plays in mitigating their propensity to manage earnings. We find that Chinese managers tend to override corporate concerns and recommend higher discretionary expense accruals in an effort to maximize their two-year bonus potential when the agency problem is present. Conversely, they tend to recommend lower discretionary expense accrual figures to help achieve corporate goals when the agency problem is not present. Interestingly, we also find that an executive’s culturally-based management style moderates the impact of the agency problem in that Chinese managers’ willingness to manage earnings across agency problem conditions is dampened more in the presence of an Eastern (Chinese) executive than in the presence of a Western (U.S.) executive