| Over the past three decades of reform and opening-up, debt financing has played anincreasingly important role in China’s social financing. In terms of private debt,companies in China have always relied heavily on the bank loans, while in terms ofpublic debt, regardless of the absolute scale or the relative proportion in social financing,the corporate bond market has been overtaking the stock market ever since2008.Therefore, increasing the proportion of direct financing has become the consensus. As animportant direct financing channel, the bond market is bound to be an unprecedenteddevelopment. Earnings management has been one of the important issues studied incorporate finance and corporate governance. Classical principal-agent theory believesthat debt financing has a governance role, which can restrain managers’ earningsmanagement behavior, but debt financing itself may also induce managers’ earningsmanagement motives. As debt financing acquirement, debt contract signing, debt pricingand bonds credit rating etc. would all have to rely on the financial accountinginformation provided by the company and the earnings ability reported by the company,company’s debt financing are necessarily connected to earings management. Focussingon the earnings management issues in debt financing, this paper studies how debtfinancing in listed companies affect managers’ earnings management behavior in China’scapital market, and how managers’ earnings management behavior affect debt financing.Discussion on these issues will be an enrichment and supplement to the research onearnings management in China’s capital market and will have important theoretical andpractical meanings in protecting creditors’ interests, improving corporate governance andstrengthening the bond market supervision.Research in this paper will follow the basic way of "putting forward questions'theoretical analysis'empirical analysis'conclusions and policy recommendations"，take the listed companies as the study objects and adopt the theoretical and empiricalanalysis, qualitative and quantitative analysis methods. In theoretical analysis, theories ofcapital structure, principal-agent, signalling, corporate control, creditor governance areused to explain the impact of debt financing on earnings management; theories ofaccounting economic consequences and effective capital market are used to explain the effect of earnings management on debt financing；game theory is used to analyze theequilibrium results between creditors’ supervision and managers’ earnings managementbehavior under financing constraint. In empirical analysis, correlation analysis,heteroskedasticity and autocorrelation test, t test with equal variances are carried out for apreliminary inspection of the data. Pooled cross-section regression model and fixed effectpanel data model are adopted to test the hypothesises. This paper also performsrobustness tests in way of regressing by groups, expanding the sample size, using theproxy variables and instrumental variables to further prove the conclusions drawn fromthe empirical analysis.This paper embraces8chapters. Each chapter is as follows.Chapter1Introduction. It introduces the background, research issues and thesignificance, research routes and methods, research contents and the framework of thispaper.Chapter2Literature review. Firstly, it introduces the related studies on earningsmanagement, and describes different earngings management measurement modelsaccording to different means. Secondly, it elaborates the studies on the governance roleof debt financing. Then it sorts out the mutual effect studies between debt financing andearnings management. Finally comments are given to extant literature and the weakareas of current studies are pointed out.Chapter3Theorectical analysis of the mutual influence of debt financing andearnings management. First it analyzes the one-way influence between debt financingand earnings management theoretically. Debt financing has dual impacts on earningsmanagement. It has governance effect on earnings management, but may also become themotive for earnings management. However, as earnings management information willproduce certain economic consequences, earnings management has different impacts onthe interests of both sides of the debt contract in different effective markets. This chapterthen conducts a game analysis between creditors’ supervision and managers’ earningsmanagement behavior. At last, it summarizes the interaction effect between debtfinancing and earnings management.Chapter4Empirical research design. Research hypothesises are proposed withrespect to the impact of the debt financing scale, debt financing mode and debt financing structure on earnings management and the impact of earnings management on cost ofdebt. Taking the2007-2011A-share major board listed companies as study samples,according to different problems, it chooses earnings management and other researchvariables. This chapter also carries out heteroskedastisity and autocorrelation tests forpanel data, and finally determines the fixed effect regression models for panel data. Fornon-panel stuctured data, pooled regression models will be used.Chapter5Empirical analysis of the impact of debt financing on earningsmanagement. This chapter empirically analyzed the impact of debt financing scale, modeand structure on earnings management respectively.(1) Regarding the impact of debtfinancing scale on earnings management，it finds that, the accruals-based and realearnings management degrees in listed companies, all decrease first and then increasefollowing the debt level increases. These results show that debt financing has a dualeffect on earnings management.(2) Regarding the impact of debt financing mode onearnings management, it finds that, after controlling the industry characteristics andprofitability impact, the accruals-based earnings management level of companies whoobtained bank loans is significantly higher than that of companies who didn’t acquireloans; both of the accruals-based and real earnings management levels of companies whoissued corporate bonds are significantly higher than those of companies who didn’t issuebonds. The results show that the new debt emergence induced earnings managementbehavior of listed companies, and also verify the capital market motive of earningsmanagement in debt financing.(3) Regarding the impact of debt financing structure onearnings management, it finds that, the proportion of long-term debt, the proportion ofbank borrowing and the proportion of bonds financing are all significantly positivecorrelated to listed companies’ upward earnings adjustment behavior. The relationshipbetween the proportion of commercial credits and earnings management behavior isuncertain. The results show that increasing any kind of debt capital would leadcompanies to manage earnings, and also verify the debt contract motive of earningsmanagement.Chapter6Empirical analysis of the impact of earnings management on debtfinancing. This chapter empirically analyzed the impact of earnings management oncorporate cost of debt and on corporate bonds pricing respectively.(1) Regarding the impact of earnings management on corporate cost of debt, it finds that listed companies’upward earnings adjustment between accounting periods is significantly negativecorrelated with companies’ cost of debt. The results indicate that creditors cannot seethrough listed companies’ earnings management behavior timely, therefore were not ableto claim higher risk returns for earnings management.(2) Regarding the impact ofearnings management on corporate bonds pricing, it finds that, prior to and in the year ofcorporate bonds issuance, earnings management level of the issuers are significantlygreater than zero; and earnings management level prior to the year of issuance issignificantly negative correlated with corporate bonds real insuing rate. The results showthat creditors in corporate bonds market were neither able to identify companies’earnings management behavior timely.Chapter7Robustness test. This chapter carries out robustness tests from differentangles for conclusions obtained in Chapter5and6. Testing results can support thehypotheses.(1) Regarding the impact of debt financing scale on earnings management,robustness test runs regressions by groups. It finds that, in the sample of low debt ratio,they are significantly negative correlated; in a sample of high debt ratio, they aresignificantly positive correlated.(2) Regarding the impact of debt financing mode onearnings management, robustness test releases the control on industry and profitabilitycharacteristics. It finds that, compared to private debt financing, public debt financinghas greater impact on companies’ upward earnins adjustment through real activities.(3)Regarding the impact of debt financing structure on earnings management, robustnessputs all debt structure variables into one model. It finds that, the proportion of long-termdebt ratio, commercial credits, bank borrowings and bonds financing are all significantlypositive correlated with earnings management.(4) Regarding the impact of earningsmanagement on corporate cost of debt, robustness test replaces the original explanatoryvariable. It finds that, listed companies’ upward earnings adjustment in currentaccounting period is significantly negative correlated with cost of debt.(5) Regarding theimpact of earnings management on corporate bonds pricing, robustness test adoptsinstrumental variable method. It finds that, upward earnings adjustment prior to the yearof issuance is significantly negative correlated with corporate bonds real insuing rate.Chapter8Conclusion and suggestions. This pater obtained some meaningful conclusions after empirical analysis. Main conclusions are:(1) Debt financing has a dualeffect on earnings management. When debt ratio is low, the governance effects of debtfinancing play a dominant role. When debt ratio is high, motives of earningsmanagement dominate.(2) In terms of debt financing mode, whether public or privatedebt, new debt issuance has indeed induced companies’ upward earnings adjustmentbehavior, and public financing has a greater impact on earnings management.(3) Interms of debt structure, the larger the long-term debt ratio, the bank borrowings ratio orthe bonds financing ratio, the more likely that listed companies manage earningsupwardly; under the common effect of other debt components, increasing the proportionof commercial credits also can significantly lead to upward earnings management.(4) Interms of the impact of earnings management on debt financing, whether examingcorporate general cost of debt or examing corporate bonds’ issuing rate, listed companies’upward earning adjustment can significantly reduce corporate cost of debt and bondsinterest rate at issuance， which means debt market can’t see through earningsmanagement behavior timely.The innovations of this paper are:(1) On the research contents, the previous studiesconcerning the effect of debt financing on earnings management, mainly focus on theone-way influence, and empirical analysis is mainly carried out from the view of “debtlevel increases”. The innovation of this paper is that it analyzes the dual impact of debtfinancing on earnings management both theoretically and empirically; in terms of theeffect of “debt level increases”, it also conducts the tests from both the broad and narrowsense.(2) On the research perspective, the previous studies concerning the effect ofearnings management produced, are mainly concerning the impact of earningsmanagement on the stock market, or testing the stock market reaction to earningsmanagement. The innovation of this paper is that it concerns the impact of earningsmanagement on debt market, and tests the creditors’ reaction to earnings management.(3)On the research methods, current domestic empirical analysis often applies event studymethod and adopts general linear regression models, which doesn’t perform in-depthexcavation and analysis for panel data. The empirical analysis in this paper underlines theanalysis of listed company’s panel data and performs detailed statistical tests andeconometric analysis for why to use fixed effect models, as well as for the heteroscedasticity and serial correlation problems in panel data. Thereby, making theempirical analysis conclusions more convincing.This paper puts forward the following policy suggestions:(1) To creditors: do notrely solely on earnings information to evaluate company; perform an ex-anteinvestigation for companies’ earnings management before signing the contract.(2) Tomanagers: strengthen the consciousness to protect creditors’ interests; improve internalcontrol system and bring internal audit to function.(3) To regulators: allow creditors toinvolve in corporate governance system by law; solve the problem of various regulatorybodies in the debt market as soon as possible.Limitations and future research directions are as follows: As restricted by the data,information and research ability, the issues of the refinement of the study objects in bondmarket, the influence of earnings management on other aspects in debt financing, and themechanism of the interaction of debt financing and earnings management are not studiedintensively. For this reason, these areas are needed to be futher explorated and excavatedin the future. |
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