Real Earnings Management And Future Crash Risk In Stock Prices

Since 2014, the stock market has been rallying, but even in such a "good market condition", individual shares slumped frequently, which caused concerns of academics and practitioners. Meanwhile, the study of real earnings management has been increasingly favored by management. However, there are not many researches on individual shares plunge from the perspective of real earnings management. In addition to that, in 2008, the six ministries jointly compiled and issued Basic Norms of Enterprise Internal Control and in 2010, five ministries formulated and issued together Enterprise Internal Control Guidelines. Since then, China’s internal control systems keep improving, internal control and constraints are strengthened, which is fundamental for company to form good internal oversight and management mechanism. What’s more, institutional investors are becoming more and more important in China’s capital markets. So does real earnings management have an influence on the risk of stock price plummeted? When a company has a higher internal quality or institutional ownership shareholding ratio, will the effect be diminished?Firstly, this paper collates relevant domestic and foreign literature, and then elaborates the influencing mechanism that real earnings management does to the risk of plummeted shares while analyzing how internal control and institutional investors affect the relation between the above two factors. To demonstrate the theoretical analysis, the thesis takes all A-share listed companies in Shanghai and Shenzhen between 2010 and 2014 as samples, using two methods to calculate share price slumping. The relation between real earnings management and future share price slumping risk is then verified through empirical study. It further discusses about the influence of internal control, the internal supervision mechanisms and institutional investors, the external oversight mechanism on the relation between the above two factors. This paper finds:Firstly, the real earnings management behavior of the management layer is significantly and positively correlated with future stock price plummeting risk; Secondly, from the perspective of internal and external supervision and management mechanisms, this paper finds that better internal control has negative effect on the relationship between real earnings management and crash risk; However, the institutional investors holding the shares couldn’t function as external supervisor, while fund and insurance investors are weaken their correlation significantly.The findings further deepens and enriches the existing research results in the field, and this finding is economically significant and valuable for the decision making of regulators, investors, listed companies and the general investors. Meanwhile, this paper also shows some limitations, which calls for further exploration and development.