Research On The Relationship Between Ratchet Effects And Earnings Management Based On Game Theory

Earnings management is becoming more and more important in the field ofaccounting, finance as well as economy. There are a large number of researches onearnings management, especially on the motivations of earnings management.However, most scholars neglect the influence ratchet effects have on earningsmanagement in their studies. This paper analyses the inadequacies of the currentresearch and studies the relationship between ratchet effects and earnings managementbased on game theory.First, this paper expounds the reseach backround, significance, contents,literature review and methods. Second, the existence of ratchet effects and earningsmanagement was examined by model and empirical approach. In addition, theresearch hypothesis is put forward, then we select the variable and build the model.Last, after the empirical analysis we get the conclusions of the relationship betweenratchet effects and earnings management. Ratchet effects are divided into positiveratchet effect and negative ratchet effect, and at the same time, earnings managementis divided into positive earnings management and negative earnings management,thus we can establish four combinations about the relationship between ratcheteffects and earnings management, namely positive ratchet effect and positiveearnings management, negative ratchet effect and positive earnings management,positive ratchet effect and negative earnings management, as well as negative ratcheteffect and negative earnings management. In this paper, discretiona ry accruals arethe dependent variable, and ratchet effect and executive compensation are theindependent variables. The data is from Chinese A-share companies from2007to2012. After the regression of16models constructed, we get the conclusion of thispaper. The results indicate that positive ratchet effect negatively correlates withpositive earnings management, negative ratchet effect negatively correlates withpositive earnings management, positive ratchet effect positively correlates withnegative earnings management, and negative ratchet effect has no significantrelationship with negative earnings management. Finally this paper puts forwardsome advices.Analysing the relationship between ratchet effects and earnings managementbased on game theory, this paper provides a new perspective for the further study ofearnings management, and broadens the research content of earnings management. Moreover, it is helpful for the majority of investors and other stakeholders to furtherunderstand earnings management of listed companies, which has a positivetheoretical and practical significance.