China Listed Companies To Manipulate Earnings To Avoid Losses

Taking the advantage of the gaps and flexibilities in laws and regulations, managers sometimes employ legal or even illegal means to purposely polish the accounting information before the disclosure, in order to get the satisfied accounting earning to gain the certain ends. This behavior that distorts the real financial situation and profit ability with specific incentives is called earnings manipulation. The study object in this paper is one of the kinds of earnings manipulation that avoids losses. On the basis of discussing the general implication, characters and influences of earnings manipulation, this paper further analyzes the special incentives, causes and means of earnings manipulation behavior in China listed companies. In addition, using the financial data of China A-share companies, this paper empirically investigates the strength of incentives of earnings manipulation to avoid losses. The by-product of this research shows that in China both A-share companies with losses and A-share companies with profits have the incentives to maintain positive earnings. Moreover, the evidence is found that incentives to avoid losses in China profitable A-share companies are increasing in the length of the previous run of consecutive positive earnings. This paper includes four chapters as below: Chapter 1: Summary of earnings manipulation. This chapter introduces the implication and function of accounting earning, give the definition of earnings manipulation after comparing earnings manipulation in China and earnings management in western developed markets, and summarizes the characters and influences of earnings manipulation. Chapter 2: Earnings manipulation to avoid losses in China listed companies. This chapter points out the present situation of earnings manipulation to avoid losses in China, analyzes the incentives and causes of this behavior, and introduces the common means of earnings manipulation to avoid losses. Chapter 3: Empirical study of earnings manipulation to avoid losses in China listed companies. This chapter reviews the achievements of previous empirical study of earnings manipulation, raises research hypotheses, uses the financial data of China A-share companies to empirically investigate whether earnings manipulation to avoid losses exists in China A-share companies, and compares the strength of incentives of this behavior among different kind of companies according to the study results. Chapter 4: Conclusion. This chapter summarizes the preceding theory analysis and empirical study, and gives some suggestions on how to restrain the behavior of earnings manipulation to avoid losses in China listed companies.