Standards Reform, Manipulation of Financial Statements and Debt Financing Based on the Perspective of Subsidiaries’ Dividends Under Dual-Disclosure System

In 2006, China published new Chinese Accounting Standards (CAS), and required Chinese companies to apply it since 2007. One big change made in new CAS is the method account for long-term equity investments, which provide opportunities for the parent company to manipulate its parent earning through transferring more dividends from subsidiaries. Based on the background, this paper investigates the effect of changes in accounting standards on corporate’s behaviors for Chinese listed companies. We find that subsidiaries of Chinese listed firms make huge payments of cash dividends to their parent companies to avoid losses or decline in earnings of parent companies after adoption of new accounting standards. In further, we find that cash dividend payments by subsidiaries significantly increase debt financing of the parent company. Overall, our study shed lights on how accounting standards reform trigger changes in corporate behaviors.