Management Influential Factors Of Earnings Management Method Selection For Listed Companies

Earnings management has always attracted great attention from CSRC (China Securities Regulatory Commission) hot topic of concern. Forced to the increasingly strong competitive pressure form capital market, controllers market and managers market, the listed companies manipulate earnings with a variety of method aiming at hitting their targets, such as allotment or issuance of new shares, avoiding being "delisted" and so on. Undoubtedly, whichever method they use, the manipulated earnings, as a kind of false information disclosures, mislead investors and disorder the stock market. What’s more, different earnings management method has different features. For example, manipulate space for accrued is clear but limited, while real activity earnings management(RM) has no boundary; earnings management through accruals(AM) are always vulnerable to supervision, but rarely for real activity earnings management. Therefore, comparing characteristics of various earnings managements, and studying on how management make decisions about using different method to hit their earnings target are of great significance for more effective supervision and investor protection.However, the research on earnings management has not been in depth yet, especially in China. Most of the existing studies focus on just one method, and some have tried to measure the manipulation level with both accrual earnings management and real activity earnings management. Only a few studies have laid eyesight on how management chose within different earnings management methods concerning a specific environment or a specific factor, such as the implementation of new accounting standards, the incoming changes of income tax rate. Overseas’ studies have shown that guidelines constraint, monitoring pressures, implementation costs and other factors will affect the earnings management methods selection. This article will start with analyzing and summarizing the features of various methods, then try to clarify wheatear some factors affect managements make decisions basing on the features and companies’circumstance, what the factors are and how they affect the decisions respectively. This article will provide some references for future studies and make efforts to enrich existing documents.Above all, the issue, selection of earnings management method, deserves the following analysis. Firstly, with asymmetric information, agency theory, contract theory as backbones, the sample range was set among companies willing to avoid losses, maintain earnings growth, and issuance or allotment new shares. Secondly, from the point of view that earnings management method selection is a kind of management decisions. Decisions vary with the specific situation, and may also be affected by deciders’preferences. So, the paper analyzes "preferences" factors in the view of each method’s advantages and detects the restrain factors arising from companies’specific situation in terms of disadvantages. Similar to the "Cask Effect Theory ", once the restrain or disadvantages play a part, it must be a key factor. According to the above analysis, this article put forward4hypotheses about factors that affect managements’decision for earnings management methods.With result of empirical test as a support, this paper arrives at the following conclusions:(1) both higher quality auditing and limited extent of accrual manipulation educe the extent of accrual earnings management significantly. Moreover, they play a significant positive effect on real activity earnings management level, namely, due to the limited capacity of accrual manipulation, listed companies will choose real activities earnings management method alternatively to hit earnings targets.(2) Other things been equal, listed companies facing intense competitive environment or competitive weakness and financial distress have much more lower level of real earnings management activities. But companies did not increase the extent of accrued earnings management as an alternative to achieve motivation. This result also suggests that managements or decision makers have realized real earnings management will affect the actual profits, damage to the company long-term value, and they tried to avoid such losses.(3) Real activity earnings management and accrued earnings management is not either-or, alternative mutual relations. The two methods correlate to each other positively. That’s to say, selection of earnings management method is not about which to use, is about using the two kinds of earnings management flexible upon above factors.This paper is divided into six sections:The first part is an introduction. It outlines the background and significance of the issue, and presents the content framework. Additionally, it also points out some potential innovation for the research.The second part is about related definition and literature review. It clearly defined accrual earnings management and real activity earnings management. Through review of earnings management, earnings management method selection and study about the two methods’relationship, a summarization about current research status is presented.The third part is about the theoretical analysis and assumption derived.In this part, the author analysis the process of management chose earnings management method step by step. Then it proposed4research hypotheses.The fourth part is research design. It includes measures of earnings management, metrics of earnings management selection influencing factors, the choice of control variables. It also presents the scope of sample selection and ideas of model design.The fifth part is empirical analysis. It uses descriptive statistics and multivariate regression analysis the proposed research hypothesizes respectively.Last, in the sixth section, the paper describes the limitation and shortcomings as well as the research direction in future.The innovation of this paper were mainly reflected in considering the inherent correlation between AM and RM, and efforts to figure out whether managements take the potential loss arising from real activity earnings management into account.