Management Ownership Structure, Impairment Of Long Term Assets And Earnings Management

Since the establishment of China's securities market, our Ministry of Finance issued several laws and regulations on"impairment", in order to improve the quality of accounting information of listed-companies, and standardize their accounting treatment. On February 15, 2006, the Ministry of Finance issued a new"Accounting Standards NO. 8 - Impairment of Assets". It forbids the reversal of recognized assets impairment provision on long-term assets. To test the effect of the new Accounting Standards, I'll research it in-depth with two methods, theoretical analysis and empirical study.At the beginning of theoretical analysis, I'll introduce the listed-companies' incentives of earnings management combined with the agency theory. Then, I analyze the logic of earnings management and Accounting Standards. Finally, I research the differences when the state controlled companies and the non-state controlled companies use the accounting standards on impairment of long-term assets. After the analysis, I propose two hypotheses: H1, the listed-companies still use the long-term impairment of assets to achieve earnings management incentives. H2, The ownership structure affects the listed-companies in using accounting standards on impairment of long-term assets. To examine the hypotheses, I use a sample of listed-companies in Shanghai and Shenzhen A-share from 2007 to 2009.My empirical findings show that: From 2007 to 2009, Listed-companies still use "impairment" of assets to achieve earnings management. They use provision of long-term assets write-down and their write-off to build up big-bath, to smooth reported income, and so on. The empirical findings also show different ownership structure of companies affect their implementation of the Guidelines. Companies controlled by state tend to write-off less impairment provisions, as compared to companies dominated by holders of non-state shares. My study has important academic and practical significance on the development of accounting standards and financial reporting.