The Impact Of Cross-listing On Earnings Management And Its Economic Consequence

The reform and opening up,the Shanghai-Hongkong Stock Connect,the Shenzhen-Hongkong Stock Connect,and the great strategy of “one belt and one road” have made the mainland capital market increasingly open with opportunities for international competition and cooperation,so as to continuously develop and improve the mainland’s capital market in the interconnection with foreign capital markets.Cross-listing of mainland companies is an important bridge between mainland and international capital market.The capital market of Hong Kong,one of the most important markets in Asia,is also a major world market,and is an important window for the Chinese mainland to understand the international capital market.Compared with the mainland,the Hong Kong capital market has a better legal system and more mature market participants,and thus,the external environment of A+H cross-listed companies is more stringent.This study examine whether the more stringent external environment in Hongkong plays a bonding role in A+H cross-listed companies and impact of the bonding role on firm performance.Bonding Hypothesis is an important theory used to explain the corporate governance characteristics of cross-listed companies in recent years.The main content of Bonding Hypothesis is that cross-listing in capital market with more stringent external supervision is conducive to alleviating agency problems and improving corporate governance.However,there are few studies using data from China and they have not reach a unanimous conclusion.In addition,most relevant studies either do not measure the level of earnings management directly or simply take accrual-based earnings management into account,ignoring real earnings management.More important,most previous studies stop at the impact of cross-listing on earnings management without exploring the consequences of this impact.Therefore,it is difficult to evaluate this impact in view of the diversity of earnings management motivation.Using a sample of companies cross-listed in A+H shares from 2007 to 2016,and using propensity score matching(PSM)to select a pair-matched control sample of companies only listed in A shares,we examine the impact of cross-listing on earnings management and the economic consequences of this impact.The conclusions are as follows:At first,the legal supervision and information disclosure standards of Hong Kong are stricter than the mainland standards.Secondly,A+H cross-listed companies have significantly less AEM and REM than non-cross-listed companies,suggesting that the more stringent legal supervision and information disclosure standards of Hong Kong play a bonding role on A+H cross-listed companies.Finally,accrual-based earnings management is positively related to future performance and real earnings management is negatively related to future performance.The reduction of accrual-based earnings management in cross-listed companies damages future performance and the reduction of real earnings management is beneficial to future performance.The results suggest that we should not blindly pursue high earnings quality and neglect the positive role of earnings quality in company.The following innovations are formed in this study:First of all,most of previous studies either does not directly measure the level of earnings management or ignores the real earnings management.In view of the importance of real earnings management,the existing research has failed to fully show the impact of cross-listing and lacks the convincing power.This paper consider both accrual-based and real earnings management to test the impact of cross-listing on earnings management.Moreover,we try to modify the level of accrual-based earnings management to eliminate the interference of real earnings management due to the problem of repeated measurement of the two types of earnings manament,getting more comprehensive and accurate results.Secondly,the existing research has discussed the effect of earnings management on future performance,demonstrating that accrual-based and real earnings management have negative impacts on future performance.The measurements of fimr performance used in prior research are probably affected by earnings management and may lead to inaccurate research results.Thus,we modify discretionary accruals and firm performance to obtain more reasonable measurements of accrual-based earnings management and firm performance,making the results more credible than those without this modification.Thirdly,most empirical studies on the impact of cross-listing on firm performance examine only the net effect,but few has examined its influence path.After examining the impact of cross-listing on earnings management,we continue to extract earnings management as intermediary variables to test the indirect effect of cross-listing on firm performance through earnings management.This paper provide powerful and substantial support for the impact of cross-listing.Finally,many literatures have studied the content difference between Chinese Accounting Standards(CAS)and International Financial Reporting Standards(IFRS)before 2007,while income statements based on new CAS and that based on IFRS are still different in both format and content of standards adopted.Compared with income statements based on new CAS,income statements based on IFRS bring incremental information to investors,providing valuable reference for the the international convergence of CAS.Based on the differences of legal system and information disclosure standards between mainland and Hongkong capital markets,this paper examines the mediating effect of accrual-based and real earnings management in the relationship between cross-listing and firm performance.The research conclusion has positive theoretical significance and reference value for China’s accounting standard setters,regulators and investors.Firstly,the results of comparative study of CAS and IFRS support the ongoing international convergence of CAS,and suggest that accounting standards makers require operating profits,asset amortization,asset revaluation,income and expenses based on IFRS to be presented as core data in financial reports,so as to enhance investors’ understanding of the true operating conditions.In addition,the conclusion can help regulators and investors understand the economic consequences of the impact of cross-listing on earnings management,and bring attention to the positive role of earnings management as an important financial strategy.