The Effect Of Earnings Management On The Expected Stock Return Of Listed Companies

Since the inception of the empirical accounting theory in the 1960s, the earnings management question has drawn much attention of economists and accounting scientists at home and abroad. In 2006, China plans to implement the new accounting standard, and the research of the correlation between accounting earnings and stock value increasingly came to the attention of domestic scholars, and obtained certain research results. In Chinese securities market, whether the earnings management exists; Whether earnings management effects the stock expected return; Whether investors are able to distinguish the real accounting income from earnings management correctly; Whether earnings management mislead the investment decisions of listed companies, etc., are all related to the operation efficiency of the securities market and the investment efficiency of investors, which deserves further research. This paper is aimed to study the effect of earnings management on the expected stock return of listed companies.Based on the sample of financial data of Chinese listed companies from 2003 to 2012, this paper conducted the modified Jones model to measure the degree of earnings management of listed companies, the implied cost of capital method to calculate the expected return, multiple linear regression model to measure the impact of listed companies earnings management to stock expected return, and robustness test with different book-to-market ratio and stock markets. The empirical results indicate that Chinese securities market has a negative correlation between earnings management and stock expected return, which suggests that investors are able to identify the earnings management behavior of listed companies effectively, eliminate the adverse effects, and judge the equity valuation correctly. Before 2006, investors aren’t good at recognizing the existence of earnings management, but after 2006, investors are able to identify the earnings management of listed companies effectively. Robustness test shows that Shanghai market is more effective, and with book-to-market close to 1, the ability of identifying earnings management of investors isgreater.