TOP MANAGEMENT COMPENSATION, EARNINGS MANAGEMENT AND DEFAULT RISK: INSIGHTS FROM THE CHINESE STOCK MARKET

China has sustained a rapid rate of economic growth and absorbed a great deal of foreign investment over the past decades. However, the laws pertaining to business in China have not kept up with China’s market growth. For this reason, investors in the Chinese stock market must assess associated risks. We set out in this study to examine the relationships that exist between default risk, earnings management, and top management compensation of publicly-listed companies in the Chinese stock market, which is now considered the most important emerging market. The results reveal a greater likelihood of default amongst larger discretionary accruals and lower top management compensation. In addition to studying the relationships which exist in the full sample, we also divide the sample into two sub-groups, based upon the signs of discretionary accruals, to investigate the likelihood of default. We find higher default potential amongst firms only falling into the category of positive discretionary accruals.