The Empirical Study On Earnings Management Of Listed Companies With Small Profits

Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers. The extensive existence of earnings management severely aggravated the quality of financial information. The modified earning information is not able to fairly reveal the financial situation and operating performance, meanwhile causes it less valuable in decision making, therefore damages the benefit of information user so that it is unavailing to the optimal allocation of social resource. Consequently it is evidently important to study on earnings management. Under the background of our security market, those companies with small profits in their reports are most likely to be considered earnings management involved. This article positively studies those companies with small profits from 2000 to 2003 and comprehensively analyses the figure of earnings management activities. This article consists of four parts and the major contents are as follows: The first part mainly introduces the background of this paper. It refers the three representative concepts of earnings management and analyses the motivation of earnings management especially tailored to those companies with small profits which includes the influence of delisting institution in our security market, the needs for the maintenance of corporate identity, the restriction of reward contract for managers, and restriction of debts contract. The second part focuses on summarizing the relevant literatures and theories. Firstly is for foreign literatures. Foreign study upon earnings management is mainly focusing on verifying the intention, the empirical evidence on which specific accruals are used to manage earnings, the magnitude and frequency of it based upon stock market, and how it influence the resources allocation. Secondly it is for representative domestic study of earnings management, which concludes that major parts of domestic positive study are using foreign one as reference. It is mainly in the respect of motivation verifying. Though some have studied the methods of earnings management, still it concerns not enough about the background of Chinese accounting system. Those studies did not clearly point out the extent of earnings management, and whether or not the newly released accounting principles can alleviate these kinds of earnings management and its influence upon resources allocation. What's more, this paper also concludes the recent earnings management literatures in china especially on companies with small profits and points out the differences compared with other studies. The third part is for positive analysis on earnings management of company with small profits. This paper utilizes the Burgstahler and Dichev's(1997)vertical-square diagram method of earnings frequency distribution to analyze ROE of total A stock listed companies from 2000 to 2003, to verify whether the companies with small profits in the sample period exist earnings management, which finds that there is unusual lower value in the interval around zero point. It proves that those companies with small profits actually widely exist some earnings management. Secondly, this paper analyzes the measure of earnings management by using modified cross-section Jones model, finding that the measure of earnings management is of different character compared with foreign classical model. It is notable for few earning companies to take the advantage of discretionary accruals in earnings management. Through the T-testing method dealing with non-recurring items of companies with small profits, this article finds that they are the major methods of EM. And through the analysis of every year's variance tendency of income it testified this argument, and the degree it affect the earnings management of company with small profits is in the ascending sequence as investing income, subsidy income, Non-operating revenue and expenditure. Combining our country's accounting system background, this paper finds that Liability Reconstruction, Non-monetary Trade, revised in 2001 is certain to...