A Study Of Internal Capital Market And Earnings Management

In positive accounting theory, the debt hypothesis postulates that the tightness of debt(such as in cases of high leverage)motivates earnings management activities(Watts and Zimmerman,1986)。 Since the bringing up of this subject,previous scholars have delve into this subject from different angles, but opinions vary tremendously on this subject. Watts and Zimmerman based Debt Hypothesis on independent public companies.Bussiness groups are similar to independent companies in many ways but are hugely different in aspect such as corporate governance and the deviation between control rights and cash flow rights.This paper investigates the role of internal capital markets,which are inherent in business groups,play in mitigating earnings management of group firms.Furthermore, this paper also investigate whether pyramid structure helps mitigate earnings management,from the angle of the Debt Hypothesis.In this paper, the internal capital market impact on earnings management research mainly elaborates the through the following five parts:The first part:introduction. This part mainly includes the internal capital market and earnings management research background and its significance, the framework and the methods of the research, the article technology roadmap.The second part:the definition of related concepts, including the internal capital market, enterprise group, the pyramid structure and earnings management.The third part:literature review. Debt contract given directly from the perspective of internal capital market research of earnings management of the existing literature is less, so this thesis will review literature from three angles namely, debt hypothesis theory and earnings management, internal market and based on debt leverage of earnings management, the pyramid structure of group enterprise internal capital market impact on earnings management has three part of literature review.The fourth part:the theoretical basis. This part mainly introduces that the enterprise group’s internal capital market is the basic theory of impact on the management of earnings management.The fifth part:empirical model design and test, first determine the research hypothesis and sample design, based on all2013pubilc listed conglomerate as sample, this thesis make use of section Jones model to measure the degree of earnings management enterprise group.The absolute value of the model that the theory can be manipulated (DACC), the greater the degree of earnings management; the more earnings management. But the smaller the absolute value of profit manipulation, the smaller the degree of earnings management. In order to prove the hypothesis, this thesis use Fan&Wong (2002) model, and this thesis takes account of the actual situation of China’s internal capital market control variables, to under the condition of internal capital markets, debt leverage for enterprise group to empirically the influence of earnings management, and further inspection pyramid ownership structure impact on earnings management.The sixth part:the empirical results and policy recommendations.