An Empirical Study Of The Relation Between Managerial Risk Preference And Earnings Management Of Listed Companies

Since the1980’s, the behavioral finance is gradually on the rise. The most basic difference between behavioral finance and traditional finance lies in the following two assumptions:Market non-validity assumption and non-fully rational assumption. Some scholars have begun to question the rational assumption, which not only impacts the traditional financial theory, and also provides a new research angle for the scholars who concentrate on the study of corporate finance and governance. Behavioral finance theory proves that due to the emotional impact of the ideas and preferences, individual judgment and decision-making will show systematic cognitive biases and limited rational behavioral characteristics under uncertainty. This limited rational behavior characteristics frequently appear in the decision-making behaviors among investors and managers. For the managers of listed companies, they face a more complex decision-making environment and a higher uncertainty of the investment project revenue, therefore, their limited rational behavior will be more apparent. The managers often adopt accounting policies which are most conductive to themselves or construct real transactions to adjust or control the earnings under the requirements of the Accounting Standards.Arthur Levitt who was the former chairman of the USA SFC said:"figures in the abstract sense are just numbers, but the figures depend on the financial report symbolize the survival and interests. The accounting figures have specific economic impact." Accounting information is an important information in measuring the company’s financial information, and the accounting earnings data is in a central position. After20years of research and development, the well-known scholars have made a lot of achievements on earnings management. Earnings management is widespread in China’s listed companies, the managers usually adopt the accrued earnings management and real earnings management to manipulate profits. Study the limited rational behavior in the corporate finance from the perspective of behavioral finance theory is conductive for the development of Chinese economic at the micro or macro. Therefore, in this context, considering the managerial risk preference for earnings management of listed companies has broad research space, and is also of great significance.This paper has two mainly study purposes. First, study the influence of managerial risk preference to accrued earnings management and real earnings management of listed companies; second, by the division of property, study the impact of managerial risk preference on earnings management for the state-owned holding companies and non-state-owned holding companies so as to reveal the differences in selecting earnings management for different nature of property rights, and provide ideas for the follow-up study.This paper uses both normative research and empirical research method. In the normative study, first of all, review the development of earnings management are reviewed, expound the theoretical foundation and motivation of earnings management and real earnings management; secondly, define the managerial risk preference and reviews the risk preference theory and behavioral finance theory; finally, analysis the effect of managerial risk preference on earnings management in theory. In empirical research, first, put forward the hypothesis of this paper through the theoretical analysis, and select the A-share listed companies from2009to2011as the study samples; Secondly, measure and evaluate the extent of earnings management of listed companies and managerial risk preference; Finally, establish the regression model and study the influence of managerial risk preference to accrued earnings management and real earnings management of listed companies and the differences in selecting earnings management for different nature of property rights to confirm the assumptions of the article.This article consists of the following six sections:The first chapter is the introduction. This section consists of three main problems:the research background and significance、the research framework and ideas、the research contents and methods.The second chapter is the literature review. This section reviews and summarizes the literature of domestic and international. first reviews the definition of earnings management and motivation, and expounds the relations and expressions of accrual earnings management and real earnings management; Secondly, summarizes the status quo about the impact of managerial risk preference on earnings management.The third chapter is the theoretical basis. This section mainly introduces related concepts as well as the theory of earnings management and managers risk preferences. First, defines the concept of accrual earnings management, real earnings management, as well as the managerial risk preferences; Second, introduces the theoretical basis of the earnings management which includes contract theory, the principal-agent theory and information asymmetry theory; Third, reviews and summarizes the risk preferences and behavioral finance theory; Fourth, through the relevant theory, analysis the mechanism that managerial risk preferences affects earnings management of the listed company and lays the foundation for the next.The forth chapter is the research design. First, put forward the hypotheses of this article according the relevant theoretical basis. Second, introduce the main variable. On the basis of the above, build the multiple regression model and explains the variables. Last, the paper explains the sample selection and data sources and make a industry classification.The fifth chapter is the empirical test. First, measures and analysis accrual earnings management and real earnings management through the model in chapter four, and evaluates the managerial risk preference by principal component analysis. The second part includes the descriptive statistics correlation analysis related to the main variables involved in the model. The last part is to analysis the regression results of the full sample and confirm the assumptions. Then analysis the different impact of managerial risk preference on earnings management between the state-owned holding companies and non-state-owned holding companies.The sixth chapter is the conclusion. This section is the last part of the article and summarizes the main conclusions of the article, proposes the relevant policy recommendations, and points out the innovation and inadequacies of this paper. The conclusion of the article includes two aspects. First, this paper confirms that managerial risk preference has a significant impact on earnings management of listed companies. Second, there are different impact of managerial risk preference on earnings management between the state-owned holding companies and non-state-owned holding companies. The main innovation of this paper is expressed in the following two aspects. First, in the previous study of the relationship of the managerial risk reference and earnings management, the scholars just considered only accrual earnings management. This paper evaluates two kinds of earnings management—accrual earnings management and real earnings management so that to fully assess the extent of earnings management of listed companies. Then study the impact of managerial risk preference on earnings management on the basis. Second, this paper compares the different impacts of managerial risk preference on earnings management in the state-owned holding companies and non-state-owned holding companies by dividing nature of property rights, and the conclusion is that:In the state-owned holding companies, managers with higher level of risk reference will take real earnings management, while in the non-state-owned holding companies, managers with higher level of risk reference will take accrual earnings management.