Research On The Earnings Management Of Chinese Listed Companies Based On Cognitive Reference Points

The quality of accounting information has long been a very important issue in the theory and practice of accounting.Earnings quality is the most important issue in the quality of accounting information.Earnings quality is of great importance both theoretically and practically.Earnings management,an indispensable issue from earnings quality,is noticed worldwide in the research field of accounting.Developing over a long period of time, classical researches on earnings management have formed a matured system and frame. However,in the first few years of the 21 st century,scandal of earnings management of large firms has been found frequently all over the world,casting serious doubt on the classical researches on earnings management.The basis of classical researches on earnings management is that people are fully rational. From the perspective of psychology,however,people are not fully rational.Instead,their behavior is affected by a great deal of intrinsic psychology factors.Therefore,studying earnings management using psychological methods may provide the researches on earnings management with a new perspective.Researches show that because of the phenomenon of "cognitive reference points", company managers may conduct a particular kind of earnings management,known as "earnings round-up behavior".Using Benford's law,a very famous rule in financial statistics, this paper counts the number frequencies in certain digits of the financial data of Chinese listed companies,and finds that such behavior also exists in Chinese companies.It is clearly demonstrated in the second and third digit of net profits and EPS's,and this behavior of Chinese companies is more significant than that of foreign companies.This paper studies earnings management with theories of cognitive psychology and statistical methods,develops the theory about motives of earnings management,and suggests a new perspective of related studies.