Research On The Relationship Between Monetary Policy And Earnings Management

Monetary Policy is the main approach of macroeconomic control. When themonetary policy turns from easy to tight, it becomes much more difficult for enterprisesto get loans from the bank. To overcome this problem, enterprises tend to do earningsmanagement in order to have a better-look financial reports, so as to show its outstandingprofit ability and debt-paying ability and get loans. Earnings management is usuallydivided to accrual manipulation and real activities manipulation. Accrual manipulationincludes under-provisioning for bad debt expenses and delaying asset write-offs. Realactivities manipulation is defined as management actions that deviate from normalbusiness practices, undertaken with the primary objective of meeting certain earningsthresholds, which is harder to notice. The previous researches on either monetary policyor earnings management mostly solely focused on the macro level or the micro level ofthe enterprise. There’re rarely researches relate these two aspects together and study thelink between them. In fact, the actions in the micro enterprises are basic elements if thegovernment wants the macro policies to work. This research on the relationship betweenmonetary policy and earnings management will not only enrich the study of monetarypolicy conduction mechanism, but also bring us the thought of whether the monetarypolicy has reached its target. This study can be both theoretically worthwhile and ofrealistic meaning.We reviewed literatures about monetary policy and earnings management. Based onthese researches, we analyzed the affection to enterprises’ earnings management themonetary policy composed on when it turned from easy to tight, and further studied theimpact that an enterprise’s form of business ownership and its growth status may imposedon. Based on Chinese Listed companies’ data from2004to2012, this paper analyzes therelation between monetary policy and earning management from the perspective ofEnterprises’ Growth and Forms of Business Ownership. The empirical findings show thatoverall, there’s a larger chance of possibility that the enterprise would engage in realearnings management when the monetary policy gets tighter; Generally, the non-stateowned enterprise has larger degree of earnings management behavior；But when themonetary policy is tight, the situation becomes different; normally, enterprises that growrapidly have larger degree of earnings management behavior; but when the monetarypolicy is tight, the difference becomes inapparent.