The Economic Consequences Of China’s Listing Corporation Real Earnings Management

The traditional earnings management is based on accruals to manipulate object of earnings management, mainly refers to the corporate management to achieve the manipulation of financial data selection and transformation through the use of the accounting policies and accounting estimates. However, more and more foreign research shows that accruals earnings management is not the management of the main ways of earnings management. The reason for this phenomenon is that the management more inclined to choose a strategy of adjustment operating activities to manage the surplus, this adjustment is not based on the company’s overall strategy and to maximize the long-term interests, just to meet current or the recent target of a surplus, such earnings management is known as real earnings management activities.Firstly, Research purposesJanuary1,2007, China’s listed companies are required to force adoption of new accounting standards, new accounting standards are more emphasis on the reliability and robustness of the financial information, which reduces the flexibility of the company’s accounting, securities market regulation gradually standardize, so the cost of the accruals earnings management become more, even more than expected to achievement of invisible income, which leads to reduce the accruals earnings management, but use more real activities manipulation of earnings management. The accrual earnings management has more researches, but the real earnings management is ignored. Foreign scholars have a more comprehensive study on real earnings management. Studies have demonstrated the existence of real earnings management behavior, studies have shown that real earnings management phenomenon (such as cutting down R&D, spending by markdowns or reduce the credit policy means to increase sales, increase production outside the normal products demand etc.) showed a significant growth trend. Real earnings management behavior is more subtle than the accrual earnings management. The economic consequences of how real earnings management behavior has not yet formed a conclusion. Whether the real earnings management behavior will affect the company’s future operating results and investors’behavior, these need further studies. This paper will research on these problems.The main purpose of this paper as follows:First, the definition of real earnings management and motivation. Second, real earnings management and it’s measurement. Distinguish between real earnings management from operating, investment and financing, then abnormal operating cash flows, abnormal production costs and abnormal of manipulation costs as a measure of the degree of real earnings management indicators, as later empirical research core variables. Finally, the economic consequences of real earnings management activities, is about the reaction of the company’s future operating results as well as investors on the company’s real earnings management behavior.Secondly, Research contentThe research idea of this paper is as follows, first of all, management’s preferences on accruals earnings management and real earnings management, literature review about the way of real earnings management and the economic consequences, in order to fully grasp the current situation and the progress of the current research to provide the necessary reference and basis for the research to be carried out in this paper. Secondly, the theoretical analysis and the theoretical basis. The theoretical part of this paper is divided into three areas,"the contract friction" and "communication block" theory, real earnings management objective and definition, motivation and means. The basis of these theories are the groundwork of assumes of this paper. Again, based on the literature review and theoretical foundation, propose three hypotheses of this article, combined with the characteristics of China’s capital market, select the sample of the study, and descriptive statistics of the study sample analysis, correlation analysis, multiple linear regression analysis on the existence of real earnings management, real earnings management on the company’s future operating results and investors’ reaction to real earnings management. Finally, draw conclusions of this study, to reflect on the deficiencies of this article and look forward to further research directions.The paper is structured as follows: Chapter I, Introduction. Explain the research background, significance, purpose, and research ideas.The chapter II, the literature review. Comb the existing research on real earnings management at home and abroad. Concrete is divided into three parts, the first conducted a literature review; accruals earnings management and real earnings management choices on preferences for management, Real earnings management has been found in the research of enterprises to use the way of classification; Finally, the economic consequences on real earnings management literature review.Chapter III, theoretical analysis. The theoretical analysis has three parts, the first part is a theoretical basis, including "the contract friction" and" communication block ", these theories are the theoretical basis of real earnings management. The second part is the objective conditions of real earnings management, real earnings management analysis of the existing system, and theoretical which "create" objective conditions. The third part is the basis of the theory of real earnings management, including the definition of real earnings management, this paper proposed a clear definition of the concept of real earnings management; motives of real earnings management; primary means of real earnings management, respectively, from the production investment and financing aspects summary.Chapter IV, empirical analysis. Based on the literature review and theoretical analysis, the three hypotheses put forward in this article as follows, enterprises will in order to meet earnings benchmarks (zero income or prior year income nearly) real earnings management; in order to achieve earnings benchmark, real earnings management will reduce the enterprises operating results; compared with institutional investors, individual investors should not be aware of the real earnings management behavior.Chapter V, empirical test. In this paper, the three hypotheses are involved in the research model, and selection of study samples to test the model. Hypothesis testing concluded that:corporate will do real earnings management to meet earnings benchmarks, which confirmed the existence of real earnings management; conditions to meet earnings benchmarks corporate does real earnings management has a negative impact on future operating results; institutional investors to be able to identify the companies real earnings management, and make Investment decision.Chapter VI, for further analysis. Respectively deferred two and three operating results and investors shareholding ratio to do further analysis of the empirical test model to test whether the impact period of real earnings management on business performance and investor reaction will continue until to the second and third accounting period, the impact of the economic consequences of real earnings management period.Chapter VII. conclusions. Combined with earlier theoretical analysis and empirical results, summarized the conclusions of this study. Analyze the limitations of this study, present the research prospects.The conclusions of this study are:The empirical findings verify the three hypotheses in this paper. Corporate does real earnings management activities to meet earnings benchmarks, and real earnings management activities have a negative impact on the future performance of the enterprise, making future performance decreased, while institutional investors can find real earnings management activities, but individual investors are not easy to find.First of all, as the theoretical analysis said, after the implementation of the new accounting standards, corporate accruals earnings management space becomes smaller, but that does not really play the role to prevent enterprise earnings management, corporate makes real earnings management to achieve the specific purposes. But such cannot bring long-term benefits for the enterprise, because when conducting business activities and decision-making in order to meet profitability targets, which is bound to weaken the long-term interests of the enterprise, so the long-term economic interests have been adversely affected. Secondly, the capital market is not completely effective, so the behavior of enterprises operating activities cannot be fully passed to investors, corporate real earnings management activities compared accruals earnings management activities is more difficult to detect, is not easy for individual investors to be a reaction in the financial statements of the enterprise, who mainly uses of the financial statements and other disclosure information. It’s difficult for them to find the real earnings management behavior and do right judgments, and therefore be the enterprise’s future performance, investors are based solely on current financial information on the pros and cons to choose whether to continue to invest in, will be blinded by the short-term good performance. Relative to individual investors, institutional investors can take advantage of its expertise and the advantage of access to information relatively to do more comprehensive analysis of the enterprise; it can make the right investment decisions to some extent. In short, real earnings management activities of the existence and the adverse economic consequences has been tested.Lastly, Expected contributionsThe contribution of this paper is:One is the defined concept of real earnings management, real earnings management is defined from a more intuitive perspective, elaborates the characteristics and conditions for recognition of real earnings management, and others can judge whether corporate behavior is real earnings management according to the definition. Second is to test the reaction of investors on real earnings management, explain the impact of corporate real earnings management activities of investors, using institutional investors holding data to study.