| With the development of security market in China and the growth in the number of listed companies, outside investors pay more attention to the disclosed financial reports when they judge the operating performance of listed companies. Therefore, when the actual performance of a listed company turns out to be below the outside forecast, the management have incentives to manage the earnings disclosed in the financial reports in order to maintain the image and the share price of the company. Studies on earnings management through accruals are common, while studies on real earnings management are few. However, because real earnings management is harder to be detected by outsiders and its manipulation range is much larger than earnings management through accruals, it is gradually used by management.In the first part of this paper, commonly used methods of both kinds of earnings management are listed. Earnings management through accruals is defined as procedures taken by the management to decorate the real economic performance. These are normally achieved through the flexible use of accounting choices, which are not implicitly against GAAP, Instead of working with book value, real earnings management is actually conducted through adjustments to operation plans. Then, the causes of earnings management are analyzed from both the angle of economics and the angle of accountancy, followed by the analysis of the constraints of earnings management where GAAP, institutional investors and outside audit are focused. In the empirical part, I use the data of manufacturing companies listed on Shanghai Stock Exchange and Shenzhen Stock Exchange between2011and2012and the model mentioned in Roychowdhury (2006) to get the final results about the existence of real earnings management and its characteristics.The results show companies with ROE between0and1%indeed have obvious real earnings management through sales manipulation and overproduction. Besides, the regression results display the positive correlation between real earnings management and earnings management through accruals. Apart from that, debt contracts restrain real earnings management to a certain extent. It also shows that companies with higher percentage of inventories and account receivables to assets are more likely to manipulate sales through limited-time price discounts and more lenient credit terms. According to the results, the following measures are recommended to better restrain real earnings management. They are improving the performance evaluation system of the management, optimizing screening standards of the delist system and improving the corporate governance system.There are mainly three innovation points in this paper. Firstly, the two kinds of earnings management are clearly separated and there is exploration of the relationship between them. Secondly, the total sample is partitioned into subsamples according to predicted levels of earnings management. Companies whose ROE are just above0and companies whose ROE are just above6%are separately researched. In addition, this paper does not stop at testing the existence of real earnings management, but further explores the characteristics of real earnings management. |
