The Influence Of Market Situation On Earnings Management

Earnings management is an important topic in accounting theory,and from the 1980s,becomes an important part of empirical accounting research.Existing studies of earnings management include earnings management incentive,degree,frequency,measurement method and the impact on the resources allocation.The earnings management incentive is an important part in this field.Existing studies of earnings management incentive mainly foucus on firm specific effects.However,from the perspective of long-term dynamics,micro-enterprises have been run in the macro economic environment,corporate behavior and output would be influenced by macroeconomic.In particular,listed companies are closely related with capital market,the market situations will likely have impact on micro-enterprise behavior,such as earnings management.Inspired by the market timing theory,this paper propose a tentative timing earnings hypothesis based on market situations.Under different market situations,information asymmetry,market reaction to earnings,regulatory risks and other factors present different characteristics.Based on the trade-offs of benefit and cost,corporate executives may be dynamically manege earnings according to the market situation,may release more earnings during bull markets.The main contents are as follows:(1)Test the existence of timing earnings.After theoretical analysis,this paper propose the timing earnings hypothesis.Then we use a variety of earnings management measurements to test our hypothesis.In this paper,we use discretionary accruals,below-the-line items,extraordinary items and asset impairments separately to measure earnings management.If firms' earnings management behavior is different under bull and bear markets,then it will give evidence of timing earnings hypothesis.(2)The impact on existing earnings management incentive.If firms' timing earnings exists,then the existing earnings management incentive may vary with market situations.We respectively test the difference of executives turnover incentive,SEO incentive,turned from losses incentive under different market situations.The main findings are as follows:(1)the results of the existence of timing earnings:(a)Using discretionary accruals,below-the-line items,extraordinary items as earnings management measunrement,we find the level of earnings management is high under bull market.So listed companies may likely choose to release more gains during bull market.After controlling the effect of conservatism change under different market situations,there is also a positive relationship benween bull market and earnings management.(b)Using asset impairments as earnings management measunrement,we find that after controlling the effect of economic factors,firm-specific factors and other reporting incentive(earnings management),we find that listed companies release more gains by reducing the net provision for impairment under bull market.In particular,impairment reversals is an important channel to manage earnings.(2)The results of impact on existing earnings management incentive:(a)Market situation,executives turnover and earnings management.Overall compared with the control sample,we find no evidence that new executives significantly increase earnings in the year after the turnover.But we find significant evidence that new executives significantly increase more earnings than control samples when the year after turnover is in bull markets.Otherwise,executives turnover firms' earnings management is lower than other control sample when the year after the turnover is in bear markets.As the executives turnover sample,when the year after the turnover is in bull markets,the new executive release more earnings than that when in bear markets.When the new executives is from outside,he/she will have more incentive to increase earnings under bull markets.We have no evidence that new executives' timing earnings behavior under bull market leads to high regulatory risk,in contrast with relatively low risk.(b)Earnings management of SEOs under different market situations.Overall compared with the control sample,we find weak evidence that SEOs increase earnings in the year before SEO.But we find significant evidence that SEOs increase more earnings than control samples when the year before SEO is in bull markets.Otherwise,SEOs' earnings management has no difference with other control sample when the year before SEO is in bear markets.As the SEOs sample,when the year before SEO is in bull markets,SEOs release more earnings than that when in bear markets.And this trend is more pronounced in public offering.We have no evidence that SEOs' timing earnings behavior under bull market leads to high regulatory risk,in contrast with relatively low risk.(c)Earnings management of loss companies under different market situations.Overall compared with the control sample,We find significant evidence that loss companies increase earnings when they turn profits.As the loss companies sample,when the year loss companies turn profits is in bull markets,loss companies release more earnings than that when in bear markets.Futher,we find that earnings management of loss company which using discretionary accruals leads to relatively low regulatory risk,but that using below-the-line items leads to relatively high regulatory risk.The contribution of this paper may lie in aspects as follows:(1)This paper proposes a timing earnings incentive based on different market situations.Existing studies of earnings management incentive foucus on firm specific effects.This paper studies the impact of market situations on earnings management.The study has contribution to the earnings management research.(2)If the timing earnings incentive exists,we may need to consider the influence of market situation in studies of earnings management incentive which we have found.There may be new understanding of existing earnings management incentive.(3)This paper introduces the theory of market timing into earnings management research,expanding the application of market timing theory.(4)Jiang and Rao(2011)reviews the challenge and criticism the mainstream accounting research faced durings the last decade,proposes a research frame work that incorporates the macroeconomic analysis and corporate behavior.This paper studies earnings management behavior over capital market cycle,and will contribute to the frame work.