The Impact Of Investor Protection On Earnings Management

A good investor protection is the essential premise of maintaining a stable capital market. However, nowadays, most of the listed companies in China are applying Earnings Management to seek personal interest, while taking outside investors'rights as trade. Thus, combing methods from different dimensions is needed to control the earnings management and protect the investors' interest. This article aims to discuss the relationship between macro environment and earnings manage through theoretical analysis and empirical method. Under the theoretical method, this article used contract theory, principal-agent model, and game theory to prove that listed company will use earnings management to harm the legitimate rights and interests of investors, while effective investor protection measure will limit this kind of behavior. This paper suggests that investor protection and earnings management shows a negative correlation.A penal data is used in the empirical study for 5383 companies'data from 2002 to 2008. The empirical results support four of the hypothesis. It proves that the higher level of China's market-oriented, the less degree of government intervention, the stronger of law's enforcement, the more conducive to protecting investor and reduce the frequencies of earnings management. However, the hypothesis about the degree of equity check and balance and the earnings management is rejected within the empirical study. It might because; in China there is usually a dominance shareholder in the list company. The other large shareholders often tend to conspire with the largest shareholder and reap some of the benefits. Beside, this article also analyses the impact of state-owned and private nature of the listed companies by adding cross-terms in the model. The result shows that the state-owned companies have less earnings management compare to private nature companies.