Institutional Incentives And Economic Consequences Of Real Earnings Management

Earnings Management includes Accrual Earnings Management and Real EarningManagement. Recently, researchers increasingly discovered that manipulating accrual items isnot the unique method to manage earnings. Management has other alternatives to achieve variedearnings goals involve avoiding reporting losses. Compared with other approaches, such asmanipulating operating, investing and financing activities, Real Earnings Management isconsidered difficult to distinguish with normal business activities, and which is also notrestrained by accounting principles. Hence, it is one kind of earnings management behavior withstronger concealment.Based on the special institutional background in China, this paper draws from domestic andforeign existing related research results, firstly, analyzing the relation between Real EarningsManagement and Accrual Earnings Management of listed companies in China. And then,investigating the effects generated by the nature of controlling shareholders ownership,government intervention, external governance environment and other institutional factors oncompanies’Real Earnings Management. Finally, this paper examines the economic consequencesof Real Earnings Management from two aspects: future operating performance and shareholder’swealth. The results show that:(1) The two-stage least squares regressions results reveal thatChina’s listed companies’ Real Earnings Management is positively associated with AccrualEarnings Management and supports the complement hypothesis;(2) Compared withnon-state-owned listed companies, the level of state-owned listed companies’ Real EarningsManagement is lower; Government intervention weakens the motivation of state-owned listedcompanies’ Real Earnings Management, and the deeper the government intervention, the lowerthe state-owned listed companies’ Real Earnings Management level, non-state-owned listedcompanies are the opposite;(3) Governance environment’s difference will significantly influencethe companies’Real Earnings Management, the better the governance environment, the lower thecompanies’ Real Earnings Management level;(4) Real Earnings Management has a significantnegative impact of future operating performance. In order to avoid reporting losses, the RealEarnings Management possesses value-damaged effect and signal transmission effect at the sametime. In general, Real Earnings Management damages company’s future operating performance;(5) Real Earnings Management has significant negative impact on future shareholder’s wealth.There is no evidence indicates Real Earnings Management with the target of avoiding reportingloss has the signal transmission effect on purchasing and holding excess earnings. This paper is based on the analysis of China’s listed companies’ current Real EarningsManagement situation. From the fundamental level, it is wrote to investigate the nature ofproperty rights, government intervention, environmental governance and other factors’ influenceon Real Earnings Management, which expands the research perspective towards earningsmanagement, also enriches the related literature in the field. This paper’s conclusion providesreferential meanings for supervision department regulates the financial reporting behaviors oflisted companies, and for enhancing the capital market construction, which helps all stakeholdersidentify listed companies’Real Earnings Management to make correct economic decisions.