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+ MODEL ARTICLE IN PRESS CORFIN-00328; No of Pages 26 Journal of Corporate Finance xx (2007) xxx – xxx /locate/jcorpfin Corporate governance and earnings management in the ☆ Chinese listed companies: A tunneling perspective Qiao Liu ⁎, Zhou (Joe) Lu 1 Faculty of Business and Economics, University of Hong Kong, Pokfulam, Hong Kong Received 16 November 2006; received in revised form 20 July 2007; accepted 24 July 2007 Abstract This paper examines the relation between earnings management and corporate governance in China by introducing a tunneling perspective. We document systematic differences in earnings management across the universe of Chinas listed companies during 1999–2005, and empirically demonstrate that firms with higher corporate governance levels have lower levels of earnings management. We study two China- specific situations, in which the listed firms have strong incentives to manage earnings in order to meet certain return on equity (ROE) thresholds, and earnings management has been shown to be the most conspicuous. We identify tunneling evidence for each. Our empirical findings, although not being able to completely exclude other explanations, strongly suggest that agency conflicts between controlling shareholders and minority investors account for a significant portion of earnings management in Chinas listed firms. © 2007 Elsevier B.V. All rights reserved. JEL classification: G32; G34; M41; M43 Keywords: Agency problems; Earnings management; Tunneling; Corporate governance ☆ The second author Zhou (Joe) Lu has been missed since his untimely p