The Empirical Study On The Relationship Between Concentration Of Ownership And Earning Management By Classification Shifting In Listed Companies

Earning management is a serious problem related to investorprotection and the setting of accounting rules. While corporategovernance is regarded as an important mechanism to affect earningmanagement, and concentration of ownership is a significant factor forcorporate governance.“Earning management by classification shifting” is to record thecore expenses (i.e. main business cost, sales expense, G&A expense) asspecial items deliberately. The method can increase the core earning butnot affect the final net profit or loss in the income statement.McVay(2006) proved that after the managers realized that they couldmeet the prediction of the financial analyst through increasing earning byshifting the core expense to special items, the earning management byclassification shifting would be adopted widelyThe paper used the method of combination of normative researchand empirical study. First, it set out some academic discussion of the relationship between corporate governance and earning management. Weanalyzed the existence of earning management by classification shiftingin China and the relationship with the concentration of ownership. In theempirical study, research design was approached, by restricted withresearch hypothesis, metric model was constructed correspondingly. Weselected data from more than4000“firm-year” from2007to2010whichthe firm is listed in domestic stock exchange as effective samples. Thispart was illustrated by two steps. First, we started our research from thepoint that whether “Classification shifting” did commonly exist byanalyzing the features in China. Second, picking up ownershipconcentration to research, by described analysis and regression analysis,we studied the relationship between concentration of ownership of listedcompany and earning management by classification shifting.Similar with the achievement by researching American companiesby McVay in2006, our results of empirical study proved that thephenomenon of increasing core earning by shifting the core expense intospecial expense items commonly existed in Chinese stock market.Furthermore, we found the level of classification shifting increased withthe ownership concentration. Finally, suggestions on the policy ofregulating earning management behavior of the listed company in Chinawas proposed: more attention should be paid on the appropriateness ofthe assertion of classification of accounting, the CICPA should focus more on the impact they could have to decrease earning management byclassification shifting, coordinate the power of different group ofshareholders etc.