Earning Management And Market Reaction

Studies found that earning management is obvious in Chinese market, especially during capital market events such as financing. As the largest emerging market, China has experienced over 30 years of prosperity and fast growth. The credibility and effectiveness of Chinese capital market is a problem arises with the stellar market performance. Our study aims the check the quality of financial information in Chinese market, as well as investors'reaction rendered by earning management.A total sample of 968 firms or 7744 firm-years is used in the empirical study from 2001 to 2008. The empirical results support our hypothesis. That is, investors can discern and react toward earning management. Besides that, strong internal and external corporate governance mechanism can help limit the earning management behavior, moreover, it can also help investors better discern and react toward earning management. Such corporate governance mechanism includes healthy ownership structure, strong external control, independent board of directors, and rigorous market regulation.