The Study On The Preferences And Market Response Of Earnings Management Of Loss Listed Companies

Earnings management of listed companies is a key research field in the modern financial accounting study. Earnings management can be originated to the eighties 20th century in Western countries, and soon became a hot issue of accounting research precisely because of the rapid development of western capital markets as well as the rise of empirical accounting research methods. Initially, the earnings management studies were limited to individual behavior within the enterprise. However, with the continuous development and improvement of the capital markets, the rapidly increasing of the listed companies, earnings management is being an universal phenomenon. Burgstahler and Dichev (1997) found that there were about 8% to 20% of listed companies taking earnings management to avoid earnings declining in the U. S. And up to 30% to 40% of listed companies were to take earnings management for the purpose of avoiding loss.Earnings management has become worldwide universal. In China, due to the special background of the capital market, earnings management is particularly conspicuous. Institutional characteristics of China's stock market make the qualification of being a listed company is called a "Shell" with high value. Unlisted companies find ways to get listed status, while listed companies would do everything they can to keep the listing qualifications for the purpose of taking advantage of the capital markets and then they can obtain more benefits. China's "Security Law" provisions that if a listed company had continuiously lost for the recent three years, it should phase out of the stock market. Delisting risk of listed company make Listed companies would do their best to turn around loss. However, loss of listed companies tackle the backlog. It is often not possible for listed companies to improve their performance significantly in a short term. In this case, earnings management has become an inevitable choice for the company lost.Previous studies of earnings management literature mostly in control of accruals and other accounting earnings management as a means to study. However, as China gradually consistence with the international convergence of accounting standards, the enhanced securities supervision and the stengthen administration, plus the improvement of the capital market investors, many foreign scholars began to pay more attention to real activities manipulation of earnings management. Research shows that companies would take manipulation of real activities and other non-accounting measures to manage earnings. Cohen (2008) found that the implementation of the Sarbnes-Oxley Act to some extent curb the manipulation of U.S. public company accounting earnings management while manipulation of real earnings management activities are somehow significantly increased. After the implementation of new guidelines in 2007 in China, Smaller flexible criteria limited, to a certain extent, the operability of the accounting policies should improve the quality of earnings in theory. Whether the implementation of the new accounting standards of listed companies will do something to earnings management? Does it make the accrual based means of earnings management of listed companies taken place by the real activities earning management as the SOX did? This paper would study the means of earnings management of the loss listed companies in China from 2004-2009 using logistic regression model. The paper concluded that accruals manipulation of loss listed companies is still the primary means for avoiding losses, but the level of manipulation has declined in recent years. Manipulation of real earnings management increased year by year and this trend is more pronounced after the year of 2007. New standards really play a role in some extent of inhibiting accrual-based earnings management. Moreover, the paper also studied the market response for earnings management of loss listed companies. In this paper, we use the company financial statements before and after the ten-day cumulative abnormal returns to measure the market reaction, using multiple regression models, and concluded that although the market investors have awareness of earnings management, there is no evidence significantly evidence that investors can identify the extent of earnings management.The paper is divided into six parts:ChapterⅠ:Introduction concludes the research background, research significance, the methods and the frameworks of this paper.ChapterⅡ:The reviewing of literature introduces the studies for the motivation of earnings management, the ways of earnings management, and then focuses on the reviewing of earnings management of loss listed companies. Finally, we refer to researches related to markets response.Chapter III:theoretical analysis about earnings management of loss listed companies. In this part, we define the companies in which accounting net income is less than zero as the loss companies. The definition of earnings management is within the context of accounting standards, using accounting methods and non-accounting methods to adjust the accounting profit. China's special motivations for earnings management of loss listed companies are also disscussed.Chapter IV introduce the earnings Management Preferences of the loss listed companies. First, introduce the theory of earnings management on a brief analysis and then propose two basic assumptions based on the above discussion. Assumption 1:The possibility of losses to profitability and its proportion to accruals manipulation is proportional. Assumption 2:The possibility of losses to profitability in proportion to its real activities manipulation is proportional. This loss listed companies for the year 2004-2009 were selected as the sample. First, descriptive statistics and empirical analysis of the manipulation of accruals and real earning management conclude that Loss of earnings management is indeed the formula listed in the project from the main control accrual accrual began to change for the control of both the real activities manipulation.Chapter V study the-market response of the earnings management of loss listed companies. The regression results show that although most investors already know the loss listed companies may use earnings management in order to achieve the purpose of avoiding loss, there is still no significant evidence that the market can identify the specific behavior of earnings management.Chapter VI:Conclusions and Implications. In this part, we propose the shortcomings and limitations of proposed article, and prospects for future research.The main contribution of this paper is:First, we analys two different ways of earnings management used by the loss listed companies in order to avoid loss. This would help regulators develop different measures to control different ways of earnings management.Second, analysis of the time trend of earnings management and the impact caused by the change of accounting standards will help policy makers improving the relevant laws and regulations, accounting standards, and enhancing the reliability of accounting information.Third, analysis of the market responds caused by different ways of earnings management would enrich the content of earnings management research.