Can The Nature Of The Ultimate Controller Influence The Relationship Between Earnings Management And Investment Efficiency?

Since the introduction of the concept of earnings management, it has been the focus of the theoretical and practical research. Earnings management activities usually aim to influence external stakeholders in decision-making, such as to secure debt financing, corporate IPO, placement, to avoid delisting and earnings management, to meet analysts’ forecasts. About the economic consequences of earnings management, extensive research results have been made, but most of those results focused on the influence of earnings management to external stakeholders, few literature concerns earnings management on internal decisions. So, earnings management can affect internal investment decisions? In our particular context of the economic system, the degree of the influence that earnings management on investment decisions for enterprises for state-owned and non-state owned will be different? Based on this perspective, this article analyze the influence of earnings management on investment efficiency, as well as the difference of this influence in depth in different equity background companies, from three angels---agency conflicts between shareholders and managers, between large shareholders and minority shareholders and information asymmetry, and aims to identify the difference of the effect of earnings management to investment decisions in different ownership backgrounds enterprises and provide a new perspective for enterprises to improve their efficiency of investment.From our theoretical and practical circles of the actual situation, this research has a strong theoretical and practical significance. In theory, scholars pay more attention to the effect of earnings management to external stakeholders or are more concerned with the effect of accounting information to the efficiency of investment. However, there is little literature on the influence of direct accounting information distortion on investment efficiency. This paper demonstrates that earnings management can effect investment efficiency, which enrich the research on the economic consequences of earnings management, and provide empirical evidence on this problem in developing countries. This paper demonstrates in depth how the effect of earnings management on investment efficiency differ in state-owned enterprises and non-state enterprises, which helps us understand why enterprises of different ownership background have huge difference on investment efficiency and enrich the literature on corporate governance.In practice, to analyzes the effect of nature of the ultimate controller to the relation between earnings management and investment efficiency systemically have great meanings to decision-makers, minority shareholders, as well as external regulators. First, for enterprises’ decision makers, when making investment decisions, it helps them to consider earnings management factors to avoid being confused by self-creation earnings, and improve investment efficiency. Secondly, for minority shareholders, it helps them to take into account that controlling shareholders violate their benefits which is concealed by earnings management and then conduct over-investment, thereby strengthening the supervision of company’s information disclosure and controlling shareholders’ behavior of investment. Thirdly, in terms of external regulators, it provides a theoretical basis for them to strengthen the supervision to earnings management in capital market, especially in state-owned enterprises.This paper is based on the capital market in China, and aims to analyze the difference of relations between earnings management and investment efficiency in enterprises of different natures of property right, as well as deep-seated reasons for this difference. Thus, this paper combines theoretical analysis and empirical method. In theory, it analyze the mechanism of how the nature of the ultimate controller effect the relationship between earnings management and investment efficiencies Empirically, it uses a large sample studies to validate the universality of this difference. This paper test date from A-share market from2009to2011and get the following conclusions:First, earnings management are positive related to over-investment and under-investment. Second, the positive correlation is more strong in state-owned enterprises, which demonstrate that earnings management could aggravate inefficient investment in state-owned enterprises. The research results about the effect of earnings management on external stakeholders have been quite rich. Based on previous studies, this paper mainly has two respects of innovations:First, this paper demonstrates the effect of earnings management directly on enterprise investment decisions. Previous studies focused on effect of the quality of accounting information on the efficiency of investment, and this paper directly verify the effect of deliberate distortion of on the efficiency of investment. Second, this paper analyzes the reason of the difference of the relationship between earnings management and investment efficiency in different nature of ultimate controller enterprises from three point of view-----the proxy conflicts between shareholders and managers, the proxy conflicts between large shareholders and minority shareholders, and information asymmetry, and empirically test the effect of the nature of ultimate controller to the relationship between earnings management and investment efficiency, which does not exist in previous studies.