Research On The Impact Of Financial Distress On Earnings Management Of Peer Enterprises

In recent years,with the continuous downturn of global economy and the strategic adjustment made by the Chinese government to economic structure,the speed of economic growth has been gradually slowed down and economic development has entered a new normal.As stressed by the state government,under the context of new economic normal,we should not only stick to promoting the strategic adjustment made to economic structure,but also establish the awareness of crisis response and risk management and control in addition to timely identifying and decisively dealing with all kinds of contradictions and risks that may occur.Under the context of macro economy,the development of enterprises as the main components of micro economy is bound to encounter various challenges.Financial distress is one of the worst crises arising from the process of corporate development,which not only poses severe threat to the survival and development of enterprises stuck in financial distress,but also has a significant impact on its stakeholders.Therefore,the economic consequences of financial distress have always been a topic that attracts plenty of attention from the theoretical and practical circles.According to the impact object of financial distress,the existing research on the economic consequences of financial distress can be categorized into the impact of financial distress on the distressed enterprises themselves and the impact of financial distress on other non-distressed enterprises,with the latter known as the spillover effect of financial distress.If a study is conducted on the impact of financial distress on other non-distressed firms in the same industry,it is referred to as the intra-industry spillover effect of financial distress.By combining the existing literature,it can be found out that the research on the intra-industry spillover effect of financial distress is mainly focused on the impact of financial distress on the stock market value,debt costs and the investment behavior of those intra-industry non-distressed firms,which means there are few studies paying attention to exploring the impact of financial distress on the earnings management of intra-industry non-distressed firms.Apart from that,there is a lack of discussion about the transmission path of financial distress impact on the behaviors of peer enterprises.In theory,there are two reasons for financial distress to affect the earnings management of non-distressed enterprises engaged in the same industry.On the one hand,intra-industry enterprises show homogeneity in respect of business model,product type,investment,and financing behavior.On the other hand,because of homogeneity,it is easy for financial distress to attract attention from the stakeholders of peer non-distressed enterprises,resulting in signal transmission effect and supervision effect.Their concern about the financial information on peer enterprises can have impact on earnings management and the quality of financial information.In reality,can financial distress affect the earnings management of intra-industry non-distressed enterprises as stated in the theory?If so,what is the transmission path of their relationship?Is there any difference in the relationship between them under different circumstances?The answer to these questions will help to enrich the results of research on the intra-industry spillover effect of financial distress and the influencing factors in earnings management,clarify the transmission mechanism behind the impact of financial distress on the behaviors of intra-industry non-distressed firms.To some extent,it is of theoretical significance and practical value for the regulatory authorities to deepen the reform of delisting risk warning system and strengthen the supervision on information disclosure,which allows those listed companies to strengthen information disclosure and attach importance to upholding the interests of stakeholders.Based on the delisting risk warning system and the existing research,this paper identifies the enterprises that are subjected to delisting risk warnings by the exchanges due to the losses made over two consecutive years,financial bankruptcy,audit denial and the violations of information disclosure as financial distressed enterprises.In the study,a discussion is conducted about the impact of financial distress on the earnings management of intra-industry non-distressed firms and the primary transmission paths between them.The research is conducted on four levels as follows.Firstly,the paper interprets the basic concepts of financial distress,earnings management,debt costs,investor site visit and auditor effort,conducts review on the literature related to the study,summarizes the characteristics and drawbacks of the existing literature,and identifies the entry point and development direction of study.Secondly,it makes reference to such theories as information asymmetry theory,signal transmission theory,modern contract theory,stakeholder theory,reputation theory,and audit risk theory,thus providing a theoretical basis for the deduction of various logical relationships suggested in this paper.Thirdly,it carries out theoretical analyses of the impact caused by financial distress on the earnings management of intra-industry non-distressed enterprises,explores the mediation paths between them from the perspective of creditors,investors and auditors,and proposes a series of hypotheses.Finally,with the data on Shanghai and Shenzhen A-share non-distressed enterprises from 2007 to 2019 as a sample,the above-mentioned hypotheses are empirically tested,and a further study is conducted on the relationships under different scenarios.After theoretical analyses and empirical tests,the following conclusions are drawn.Firstly,financial distress will reduce the earnings management of intra-industry non-distressed enterprises.Secondly,cost of debt is one of the mediating paths for financial distress to affect the earnings management of peer enterprises.That is to say,financial distress not only forces peer non-distressed enterprises into increasing information transparency but also reduces earnings management by increasing the debt costs burdened by peer enterprises.From the perspective of enterprise heterogeneity,the positive relationship between financial distress and the cost of debt of intra-industry non-distressed enterprises is more significant in non-state-owned enterprises and those enterprises with lower interest protection ratio.From the perspective of industry heterogeneity,the positive relationship between financial distress and the cost of debt of intra-industry non-distressed enterprises is more significant in those industries with higher debt levels and higher degrees of competition.Thirdly,investor site visit is one of the mediating paths for financial distress to affect the earnings management of peer enterprises,which means financial distress reduces the earnings management of peer enterprises by increasing investors’site visit activities on peer enterprises.From the perspective of enterprise heterogeneity,the positive relationship between financial distress and investors’ site visit activities is more significant in non-state-owned enterprises and the enterprises with a higher degree of information asymmetry.From the perspective of industry heterogeneity,financial distress has a more significant effect on increasing investors’ site visit activities in the industry with lower debt levels and higher degrees of competition.Finally,auditor effort is one of the mediation paths for financial distress to affect the earnings management of peer enterprises.That is to say,financial distress reduces the earnings management of peer enterprises by increasing the auditors’ effort for peer enterprises.From the perspective of enterprise heterogeneity,the positive relationship between financial distress and auditor effort is more significant in non-state-owned enterprises and the enterprises audited by four international accounting firms.From the perspective of industry heterogeneity,the positive relationship between financial distress and auditor effort is more significant in the industries with higher debt levels and higher degrees of competition.The main contributions of the study are detailed as follows.Firstly,it expands the scope of research on the intra-industry spillover effect of financial distress.Most of the existing studies on the intra-industry spillover effect of financial distress are limited to examining the impact on the stock price and the market value of peer enterprises,with little attention paid by domestic research to exploring the economic consequences of financial distress from the perspective of peer enterprises.Based on information asymmetry theory,signal transmission theory,and modern contract theory,this paper focuses on investigating the impact of financial distress on the earnings management of peer enterprises,expands the research perspective of economic consequences caused by financial distress,and enriches the theoretical research on the intra-industry spillover effect of financial distress.Secondly,it explores creatively the paths for financial distress to affect the earnings management of peer enterprises.Based on the stakeholder theory,reputation theory,and audit risk theory,this paper explores the paths for financial distress to affect the earnings management of peer enterprises from the perspective of creditors,external investors and auditors of peer enterprises,which leads to the finding that financial distress can affect the earnings management of peer enterprises by exerting influence on debt costs,investors’site visit and auditor effort.From the perspective of stakeholders of peer enterprises,this paper conducts an in-depth discussion about the path for financial distress to affect the earnings management of peer enterprises,and deepens the research on the economic consequences of financial distress.Finally,this paper widens the research perspective of the influencing factors in earnings management.In the existing literature,it has been discussed a lot with regard to the influencing factors in earnings management,mainly including capital market motivation,contract motivation,and regulatory motivation.However,little attention has been paid to exploring the impact of financial distress on the earnings management of peer enterprises.This study widens the research perspective regarding the influencing factors in earnings management.