Do debt financing, tech-driven transformation and corporate governance enhance or constrain financial reporting quality? Evidence from China

Abstract

This study investigates how debt financing and technological advancement moderate the relationship between board-level corporate governance mechanisms and earnings management (EM) in Chinese listed financial firms. Grounded in agency theory and stakeholder theory, the research utilizes a panel dataset of 228 financial firms from 2010 to 2022. To test the proposed hypotheses, the study employs dynamic GMM modeling to address endogeneity, including reverse causality, omitted variable bias, measurement errors and unobserved heterogeneity, and uses Driscoll-Kraay standard errors to correct for heteroskedasticity, autocorrelation, and cross-sectional dependence. The findings reveal that board independence and ownership concentration significantly mitigate EM, while CEO duality is positively associated with increased earnings manipulation. Furthermore, debt financing enhances the effectiveness of governance mechanisms in constraining EM. Technological advancement also plays a crucial moderating role, strengthening the capacity of governance structures to reduce EM. These results highlight the importance of integrating governance frameworks with financial and technological strategies to improve the integrity of financial reporting. The study offers practical implications for corporate managers aiming to enhance governance effectiveness, and for policymakers seeking to reinforce regulatory mechanisms in China's financial sector. Overall, the research contributes to the broader discourse on corporate governance, transparency, and financial stability in emerging markets.