The Study Of Discontinuity In Earnings Distribution And The Trade-off Between Accrual And Real Earnings Management Of Listed Companies

To meet the target earning threshold is one of the motivations for earnings management, these earning thresholds include: zero earning, the previous year’s earning and the analysts’ expectation. Existing research shows that there is an obvious discontinuity in earning distribution at the thresholds, and based on this phenomena, a lot of research use the earnings distribution to test the earnings management behavior. However, this method is based on the assumption that the discontinuity of earnings distribution is caused by earnings management. While in recent years, abroad studies have found that in addition to earnings management, there are other factors that lead to the discontinuity of earnings distribution. In addition, most domestic studies focused on accrual earnings management, but a growing number of studies have found that manipulation of the actual business activity is also an important way of earnings management. Based on this, this paper attempts to explore three issues:(1) the relationship between the discontinuity of earnings distribution and earnings management;(2) whether the management inclined to chose different earnings management to meet different earnings threshold;(3) what factors will affect the choice between accrual earnings management and real earnings management?By researching literature home and abroad, I combed the research of discontinuity of earnings distribution and existence of earnings management, the relationship between accrual and real earnings management, the factors affect the choice between accrual and real earnings management. Then I proposed three assumptions:(1) the existence of discontinuity of earnings distribution,(2) it is the earnings management lead to this phenomenon,(3)the factors that affect choices between accrual and real earnings management.Results of this study shows that there is an abnormal change at zero earning, the last year’s earning and the analysts’ forecast earning in the distribution of the earning before and after the fourth quarter. However, in specific earnings manipulation items, the companies who turned from micro-loss to micro-profit after the fourth quarter and turn from the micro-drop to micro-growth, have higher degree of accrual earnings management. While the companies who maintain micro-profit and maintain micro-growth pre- and after the fourth quarter have higher degree of real earnings management. While the companies in order to meet analyst earnings expectations have higher degree both in real and accrual earnings management. In the study of choice between accrual and real earnings management, I found that the firm with higher accounting flexibility, have higher degree of earnings management, and lower degree of real earnings management; the firm audited by lager accounting firm, have both higher degree of accrual and real earnings management; however, the firm with higher degree of analyst coverage, have both higher degree of accrual and real earnings management. The reason may be that the one hand the lack of experience of the follow-up analyst; on the other hand, analysts face interest relationship with the management and performance pressure, etc., making it unable to play its oversight role effectively. While the cost factors of real earnings management, the firm with higher status in industry have higher degree of real earnings management, and lower degree of accrual earnings management; the firm with poorer financial condition have higher degree of accrual earnings management, and lower degree of real earnings management; the firm with higher institutional investors holding, have lower degree of accrual and real earnings management, indicating that institutional investors play a good governance role in restrict accrual and real earnings management behavior; Finally, I proposed the policy recommendations to investors, external auditors, analysts as well as regulatory agencies.