Game Analysis On Firm's Earnings Management

Because accounting information asymmetry is inevitable and accounting laws is imperfect, and also self-interest motivation of the management, Earnings management has become a common phenomenon. To some extent, earnings management plays a positive role in treating the rigidity of contracts and obstacles of communicating information. But excessive earnings management damages the quality of financial accounting information and weakens the reliability of financial accounting information. Especially in China earnings management was abused by listed companies and so become one important reason of accounting information distortion. How to regulate earnings management has become the most urgent problems in accounting and economics circles.The theoretical significance of this paper is enriching literature about earnings management based on new development of earnings management home and abroad. At present the literature on earnings management focus on motivation, methods and results and so on. This paper turned to the basic source and analyzed the main reasons and gambling process with game theory. Also it gave some suggestions at last.The practical significance of this paper is providing some a reference frame for government in formulating accounting system and standards aiming at regulating our capital market. Also, it can help investors understand earnings management and accounting information provided by firms in order to protect their ownership. In a word, this paper provided positive practical significance in promoting the function of allocating social resources and improving corporation governance structure.This paper included seven parts:Chapter 1 is introduction. According to the status of earnings management, this chapter introduced the background and significance of the theme and reviewed several authoritative concepts of earnings management. It summarized research methods and frame, innovation and shortage.Chapter 2 is about literature review. The later research is based on the former. Researchers home and abroad have made extensive researches in motivation, methods, market reaction and regulation about earnings management. This chapter made a brief review about motivation and methods of earnings management and made a premise for succeeding parts.Chapter 3 is theoretical analysis about earnings management. Before analyzing gambling analysis, we need to analyze the implication, methods and motivation of earnings management. Because of remuneration system and debt soft constraint in China, the motivation of earnings management possessed unique characteristics. This chapter expounded methods and motivation of earnings management and also analyzed bidirectional effect of earnings management.Chapter 4 is about gambling analysis of earnings management in Chinese firms. The executors of earnings management gambling are listed companies and investors under capital market motivation. The executors of earnings management gambling are listed companies and government under political cost motivation. This chapter made gambling analysis of earnings management under capital market motivation and political cost motivation in order to differ their strategy selections.Chapter 5 is about gambling spaces of earnings management in Chinese firms. In the premise of analyzing system background in China, this chapter made theoretical explanation on the earnings management spaces between the government, investors and listed companies to make readers recognize the possibility of gambling among them.Chapter 6 is about gambling results of earnings management in Chinese firms. Firms mainly made earnings management through three methods:increasing profits, decreasing profits and smoothing profits. All of them were overused by Chinese firms. This chapter made a gambling result of overusing earnings management in Chinese firms based on analyzing the earnings management cases.Chapter 7 gave some suggestions on the regulation excessive earnings management in China based on the game analysis. In the last chapter we have recognized the result of overusing earnings management in chinese companies, this chapter gave some suggestions on the regulation excessive earnings management from the government perspectives. To the investors, they need to make some rational thinking about earnings management and keep peaceful mind.The innovation of this chapter concluded two aspects. First, we find the possibility of listed companies making earnings management is a decreasing function of the possibility of government regulating strictly, and we also achieved the probability distribution. This paper qualitatively and quantitatively explained their strategy selection. Second, this paper find when the possibility of listed companies making earnings management is less than balanced probability, investors select not investing because of firm's profitability falls short of investors' expectation. But when the possibility of listed companies making earnings management is more than balanced probability, investors make investment with higher expectation. This implies earnings management misleads investors.The shortage of this paper is limited literature. Although this paper analyzed the formation through game theory, it doesn't quantify the degree of earnings management. It needs further study and it is also the author's future research direction.