The Relationship Between Earnings Management And Capital Expenditure--Based On Financial Constraints

Earnings management has been a hot issue in finance research area, in particular the economic consequences of earnings management has always been of concern, but the literatures rarely explore whether earnings management will affect their business decisions and allocation of resources within the enterprise. Investment decision is very important, the relationship between investment and earnings management is not clear. MM theory in 1958 is an foundation of investment theory. MM theory belives that in a perfect market, the company's investment decision has nothing to do with the financial structure, which means that external funds and internal funds can be completely replaced. But the real market is not perfect, it makes the investment theory which related to profits more and more important, that is, the capital expenditure is limited by the level of corporate profits and financial status.Earnings management will affect the report earning numbers, one important incentive of earnings management is to get low-cost external financing, and financial is the base of investment, so the earnings management is related to capital expenditure based on the financial constraints and profited investment theory. Then will earnings management affect capital expenditure? How does it affect capital expenditure? What is the mechanism? Western scholars have started to explore the issue, but merely to explore the relation ship between them, the mechanisms is still not clear. And Western scholars have used the data like the United States and other developed countries, thoes country get lower asymmetric information, have a clear system of property rights, economic freedom is high, the market mechanism is better. But the market economic history of Chinese is very short, so the system is not perfect, the market is not standardized. There are very significant differences between the developed market and Chinese market. Therefore, it is necessary to investigate the relationship and the mechanisms between earnings management and capital expenditure based the actual situation in China.This paper investigate the relationship and mechanism between earnings management and capital expenditure using data from Chinese capital market, hoping to have a modest contribution to the study area. The study on the topic is conducive to further clarify the role of earnings management also help to answer the question of whether earnings management affect internal resource allocation, can extensive economic consequences of earnings management research. At the same time, it make the investment dicision of businesses more scientific and more rational, it also help to protect investors, creditors and other stakeholders. It also has important theoretical and practical value for the government and financial institutions to develop relevant measures and decisions.This article is divided into seven chapters:The first chapter is the introduction, which introduces the research background and significance of the topic, contents, methods and technical routes; second chapter for the relevant literature review and theoretical analysis; third chapter is the measurement of earnings management, financing constraints; fourth chapter is to analysis the relationship between earnings management and corporate investment; the Chapter five analysis relationship between financing constraints of earnings management; Chapter six analysis how fiancial constraints impact the earnings management sensitivity of investment. Chapter seven is the conclusion. The corresponding results are as follows:(1) Find the positive relationship between earnings management and capital expenditure in Chinese capital marketWe took the Chinese listed companies from 1998-2006 as research samples, under control the cash flow, investment opportunity and growth of company, we find the there is positive relationship between earnings management and investment.(2) Easy financial constraints is an important incentive of earnings management and earnings management can easy financial constraints.We find that to easy financial constraints is an important incentive of earnings management, based on control other incentives.We use the cash flow sensitivity of cash to proxy financial constraints, we find that increase the earnings management can decrease the cash flow sensitivity of cash. And we use the logistic model to analysis the impact from earnings management to debt and issue equity. We find that earnings management can increase probability to get debt and issue equity.(3) Easy financial constraints is an important channel and mechanism of earnings management to impact capital expenditureWe analysis the relationship between earnings management and investment based on financial constraints. We find that the financial constraints is positive related to the earnings management sensitivity of capital expenditure. This prove that to easy financial constraints is an important channel and mechanism between earnings management and capital expenditure.