Does Guarantee Network Reduce Firms' Earnings Management?

Using data from China, this paper investigates the effect of a guarantee network on firms' earnings management. The results suggest that guarantee networks significantly reduce earnings management and this effect is more pronounced under tight monetary policy. Further analyses suggest that guarantee networks reduce earnings management through supervision mechanism rather than financing mechanism and earnings management reduction effect depends on the property ownership and related-party guarantee of the network. Our study provides new insights on the positive effect of guarantee networks in China and contributes to the governance role of guarantee networks.