Accounting Manipulation In Listed Companies’ Interim Reports:Motivations And Economic Consequences

Theorists generally believe that interim financial reports mainly aim to help stakeholders obtain more timely accounting information.Prior studies have also confirmed that interim reports are informative and can influence analysts’earnings forecasts and investors’investment decisions,which in turn can affect the efficiency of the capital market.However,the interim report is useful only if its accounting information is true and reliable,otherwise,it will mislead stakeholders’ decision-making and cause serious economic consequences.Under the Chinese specific background,interim reports are not required to be compulsorily audited in most cases.The institutional rule relaxes the constraints on accounting manipulation in interim reports(hereafter IAM),which can easily lead to the distortion of accounting information.In practice,Shandong Molong and Kangmei Pharmaceutical have been subject to administrative penalties by the CSRC for accounting fraud in their interim reports.Related studies also found that listed companies generally carry out IAM before major shareholders reduce their shareholdings,and thus attributing the motivation of IAM to pressures from the capital market.The above findings and practices show that although interim reports can overcome the lag of annual report disclosure and provide stakeholders with timely accounting information,the lack of external audit and the existence of interest motivation makes it difficult to guarantee the quality of their accounting information.The distorted interim reports not only will mislead stakeholders’ decision-making,but also can lead to abnormal phenomena such as performance reversal,which will damage the resource allocation of the capital market.Therefore,it is necessary to comprehensively identify the motivation and fully reveal the economic consequence of the IAM,and verify what can effectively inhibit the IAM.Research on the first two aspects can increase theoretical and practical knowledge of the IAM,and improve the decision-making efficiency of stakeholders and the resource allocation efficiency of the capital market.Research on the last aspect can improve the accounting information quality in interim reports to achieve high-quality development of the capital market.Taking A-share listed companies from 2007 to 2020,according to the logical framework of "manipulation motivation→IAM→manipulation consequences",this study identifies the motivation of the IAM,then examines its effect on the information environment of the capital market,from the perspective of stakeholders’ decision-making.On this basis,we also examine its impact on capital market efficiency and verify the role of the information environment in such impact.As institutional and non-institutional factors often complement each other in constraining the behavior of micro-entity,we also explore the institutional and non-institutional factors to restrain the IAM.The main findings are as follows:Firstly,Credit motivation and political motivation is the key motivation of IAM.(ⅰ)In terms of credit motivation:We find that the higher the credit demand of listed companies in the coming year,the higher the degree of accounting manipulation in the third-quarter report,and both short-term and long-term credit demand will lead to such accounting manipulation.The positive relationship is relatively more significant in periods with tighter monetary policy,in areas with lower level of digital finance,and companies with higher financial constraints and higher market competition.Overall,the results show that the credit demand in the coming year is one of the motivations to induce IAM.(ⅱ)In terms of political motivation:We find that the greater the interim economic growth pressure of local governments,the higher the degree of the IAM of listed companies.Specifically,the economic growth pressure in the first-quarter/half-year will induce accounting manipulation in half-year/third-quarter reports.The positive relationship is relatively more significant in areas with lower level of marketization,in years immediately before the turnover of provincial officials,and in state-owned enterprises and companies with higher financial constraints.Further research indicates that the 12th ’Five-Year Plan’ could weaken the above positive relationship.Overall,the study suggests that the interim economic growth pressure of local governments is also an incentive for the IAM.Secondly,IAM will mislead auditors’ and analysts’ decision-making,and further worsen the capital market information environment.(ⅰ)In terms of auditor’s decision-making:We find that the higher the degree of the IAM,the stronger the tendency to conduct audit opinion shopping(hereafter OS)in annual reports.Mechanism research showed that the above positive relationship mainly exists in samples with no performance reversal,indicating that avoiding performance reversal plays a key role in the above impact.In terms of governance factors,the system matching of financial reports and the auditor’s reputation are all effective to restrain the IAM and its effect on the OS.Generally speaking,the study shows that there is indeed the inertia of manipulation from interim reports to annual reports.(ⅱ)In terms of analyst’ s decision-making:We found that the IAM is significantly and positively associated with analysts’ annual earnings forecast errors and diversities,suggesting that the IAM can reduce analysts’ earnings forecast accuracy.Mechanism research showed that information asymmetry plays a key role in the above impact.In terms of governance factors,the system matching of financial reports and the analysts’ industry expertise are all effective to restrain the IAM and its effect on analysts’ forecasts.Overall,the study shows that IAM reduces the predictive value of interim reports,and undermines the information transmission function of analysts.Thirdly,IAM will improve the stock price synchronicity and stock price crash risk,and further decrease the capital market efficiency.(ⅰ)In terms of stock price synchronicity:We find that IAM is significantly and positively correlated with stock price synchronicity,suggesting that IAM can prevent the release of firm-specific information and its reflection in stock prices,thereby exacerbating stock price synchronicity.Mechanism research indicates that the OS in annual reports and the analysts’ earnings forecasts plays a mediating role in the above relationship,suggesting that IAM can deteriorate the capital market information environment and thus reduce capital market efficiency.In terms of governance factors,the system matching of financial reports,the auditor’s reputation,and the analysts’ industry expertise are all effective to restrain the IAM and its effect on stock price synchronicity.(ii)In terms of stock price crash risk:We find that IAM is significantly and positively correlated with stock price crash risk,suggesting that IAM can prevent the release of bad news information,thereby causing the stock price bubble to continue to gather with the disclosure of interim reports,and increasing the stock price crash risk.Mechanism research indicates that the OS in annual reports and the analysts’ earnings forecasts play a mediating role in the above relationship.In terms of governance factors,the system matching of financial reports,the auditor’s reputation,and the analysts’ industry expertise are all effective to restrain the IAM and its effect on stock price crash risk.The research innovation is reflected in the following:Firstly,by promoting the research object of accounting manipulation from "annual report"to "interim report",and systematically revealing the motivation,economic consequences and restraints of IAM,this study expands the existing research of accounting manipulation.While the quality of accounting information in annual reports has long been given full attention by theorists,interim reports are often neglected.Despite the richness of the annual report’s research,their findings may not apply to interim reports.Thus,focusing on "interim reports"to study the accounting manipulation can enrich related literature and promote the theorists’awareness of IAM.Secondly,by comprehensively examining the motivation of IAM from the perspective of credit motivation and political motivation,this study reveals that both credit pressure from banks and political pressure from the government can induce IAM.Thus it enriches the literature of motivation of IAM.Scholars have mainly concentrated on the capital market motivation of IAM.However,such perception is limited as it ignores other users of information outside the capital market.The potential users include not only investors and analysts within the capital market,but also banks and government departments outside the capital market.Credit pressure from banks and political pressure from the government may also induce IAM.Therefore,this paper incorporates the users of information in interim reports and examines the motivation of IAM comprehensively,which can break through the limitation of previous studies that only focus on capital market motivations and thus provide a theoretical basis for investors and other information users to effectively identify the IAM.Thirdly,from the perspective of the capital information environment and capital efficiency,we find that IAM will mislead auditors’ and analysts’ decision-making,and further improve the stock price synchronicity and crash risk.Thus,it provides preliminary evidence for the study of the economic consequences of IAM.The IAM will inevitably distort the accounting information in interim reports,which in turn will bring serious economic consequences to the capital market.However,up to date,there has been no research on the economic consequences of IAM.This paper finds that IAM not only misleads auditors’ and analysts’ decisions but also exacerbates the stock price synchronicity and crash risk.It means that IAM deteriorates the capital market information environment and ultimately decreases the capital market efficiency.The findings provide preliminary evidence on the economic consequences of IAM and remedy the paucity of previous literature in this area of research.Fourthly,from the institutional perspective,we explore factors to safeguard the quality of accounting information in interim reports and find that the system matching of financial reports is a key factor in curbing IAM,thus providing a useful reference for the synergistic reform of the disclosure and audit system of financial reports in China.Institutional factors are the root cause of micro-entity behavior.Actually,the IAM is due to the mismatch between the disclosure and audit system of financial reports.In this regard,the coordinated reform of the disclosure and audit system should fundamentally alleviate the IAM.The empirical results of this paper confirm this view.Therefore,this paper explores the inhibiting factors of IAM from the institutional perspective,not only can expand the research on the governance factors of accounting information quality but also can provide significant theory proofs for the reform and implementation of the disclosure and audit systems.