Corporate governance effects of state asset protection: A perspective on real earnings management

•State asset protection reduces the real earnings management of SOEs by improving the level of corporate governance.•State asset protection under the SOAE Law effectively safeguards the interests of shareholders by addressing the issue of absent owners in SOEs and enhancing the internal corporate governance structure.•The corporate governance effects of state asset protection occurs mostly in firms with non-Big4 auditing, lower analyst following and weaker internal control quality. State-owned enterprises (SOEs) play critical roles in China's economy. This paper employs difference-in-differences method to explore the corporate governance effect of state asset protection based on China's Law on State-owned Assets of Enterprises. The study finds that state asset protection reduces the real earnings management of SOEs by increasing their corporate governance level. This policy effect occurs mostly in firms with non-Big4 auditing, lower analyst following and weaker internal control quality. This paper enriches research in law and finance, expands the literature on property rights theory, and provides empirical evidence for governments to complete policies to clarify ownership in the future.