Are top executives important for earning management and firm risk? Empirical evidence from selected Chinese firms

PurposeThis study examines the role of the observable and unobservable characteristics of top management on earning management and firm risk in China.Design/methodology/approachThe authors used manager-firm matched panel for 104 non-financial firms listed on the Shanghai Stock Exchange between 2010 and 2018. The authors also trace the persistence of managerial financial styles and their active role across two different firms between which managers switched during the sample period.FindingsThe results show that managers' financial styles indeed influence earning management and firm risk and that this influence differs across different managers. These findings are robust when tested for the persistence and active role of managers. Furthermore, individual characteristics such as age, gender, qualification and experience influence managers' financial styles.Practical implicationsGiven their findings, the authors propose that financial analysts and potential investors should not only depend on quantitative data but also consider the individual characteristics of managers when evaluating firms.Social implicationsThe findings of this study carry serious implications for managers, policymakers and potential investors. The findings assist the external auditors in measuring the risk of material misstatement, the various regulatory bodies to assess the quality of financial reporting and the users of financial statements to evaluate the earnings and make further investment decisions considering not only the quantitative data but also the individual characteristics of top managers.Originality/valueThe current study examines the observable and unobservable characteristics of top management on firm risk and earnings management in Chinese context.