Study On Relationships Between Business Strategy And Earnings Quality

The rapid development of capital market, increasing of the listed company number and the rising of people’s investment awareness lead the stakeholders to put more attention on the quality of information disclosed by the listed firms. Because of the rich information of the earnings information, stakeholders are particularly concerned about the earnings information and take it as the basis of decision making. However, lots of factors, such as the discretionary power of CAS, equity incentive and information asymmetry, give an opportunity to the management to engage in window dressing which have a negative impact on the stakeholders’ decision-making. If wanting to hold the initiative in the constantly-changing environment, the enterprises have to formulate appropriate business strategies. Different strategies put its concentration on different field, so the decision of business strategy will have an impact on the choice of accounting policies, then influence the earnings quality. At present, researches on the relationships of business strategy and earnings quality are rarely, so it is necessary to exploit the relationships between business strategy and earnings quality.This paper first analyzes the background, significance of this study, objectives, contents etc. Then through the review of lots of literature, we get the research points of this paper. Based on principal-agent theory, political cost theory and business strategy theory, we put forward the hypotheses of this paper, and make an empirical research on the hypothesis of this study. In the empirical part of this paper, the research sample is listed firms of the manufacturing industry from 2007 to 2013. We take accounting conservatism and earnings management as a proxy for earnings quality. Our proxy for accounting conservatism is measured by C-score measurement method, and earnings management is based on Modified Jones model, using the absolute value of subjective accruals as a proxy for earnings management. Then the classification of business strategies is consistent with Hill and Snell, finally we conduct an empirical test. The research suggests that the defender firms are more likely to engage in earnings management and with a low level of accounting conservatism, and the prospector firms are less likely to engage in earnings management and with a high level of accounting conservatism. In the last part of the paper, we puts forward the corresponding suggestions from the view of firms and stakeholders.