Empirical Research On The Relationship Between Market Power,Internal Corporation Governance Mechanisms And Earnings Management

Earnings management serves as an important subject in the field of accounting research. The quality of financial reports and the fairness are highly correlated with the severity of earnings management. The research on earnings management of listed companies has important theoretical and rea listic significance which promotes the healthy development of China’s security and capital market.Product market makes one of the most important external environment, confronting the listed companies. The listed companies obtain their market power matching its market status in the fierce market competition, which indirectly influences their earnings management behavior. In addition, the internal governance mechanism exerts a internal factor of the enterprises’ earnings management. Constrained by the market power and internal governance mechanism, in this paper, the research concerning earnings management behavior in the firms, has rigorous logic and integrity.This paper is divided into three parts: the first part is literature review that involves interpretation of the earnings management’s basic concept, motivation and the main methods of earnings management in the domestic listed companies. This paper explores the relationship between internal governance mechanism and earnings management from three aspects which are the shareholder structure, characteristics on the board of directors and the board of supervisors. besides, it also analyzes the relationship between market power and earnings management from the perspective of market competition, followed by putting forward some relevant research hypothesis. Secondly, this paper uses cross-sectional adjusted Jones model for the estimate of manipulation of accruals to quantitative analyse the severity of earnings management of the listed companies, takes the Lerner Index to calculate their market power, selects the important proxy variables to measure their internal governance mechanism. After that, designing an empirical regression model and collecting the corresponding data of these listed companies from 2010 to 2011 in Shanghai and shenzhen A-share market for regression analysis. Finally, the article analyzes the empirical regression results, and puts forward some conclusions and suggestion. The paper has main conclusions as follows:(1) A better corpo rate governance mechanism can contribute to effectively restraint the earnings management behavior in the enterprises. Optimizing the ownership structure, ameliorating governance mechanism on the board of directors and enhancing the governance on board of supervisors will be the effective methods of reducing the enterprise’s earnings management severity.(2) Assessing the product market power of listed companies can help with forecasting the severity of their earnings management and provide the evidence when judging the quality of their financial reports. Market power can behave as a significant complementary effectiveness in the fact that internal governance mechanisms affect earnings management, specifically, there are substitution effect between market p ower and the size of the Board and the Supervisory Board, complementary relationship between the proportion of independent directors and ownership concentration.(3) Regarding the relationship between market competition and earnings management, Government departments should help to cultivate a completely competitive environment for every industry to reduce the occurrence of administrative monopoly. Strengthening the supervision and construction of legislation, meanwhile, completing the enterprise supervision and management mechanism are the important ways to constrain and manage the earnings management in domestic listed companies.