Checks And Balances Of CEO Power, Marketization Process And Corporate Earnings Management

Earnings management,which owns the evolution history of accounting field,has become a research focus since 1980 s for its various methods,concealed operations,profitable purposes and widely effects.With the development of capital market in China and the gradual perfection of modern enterprise system construction,earnings manegement changed its pure accounting action and permeated into the managerial enterprise administration.As one of the behaviors caused by the agency problems,earnings manegement will undermine the authenticity and reliability that a financial report should have and mislead stakeholders to make wrong judgments and decisions.Therefore,research about how to restrain the behavior of earnings management is fully necessary.The current researches mostly focus on strengthening the board of supervisors' force and enhancing the board of directors' independence as well as applying the equity incentive measures to the senior executives,aiming at reducing their frequency and degree on earnings management.However,when the senior executives are firstly classified into the target that should be restricted,there will be anchoring wrong decisions,and if they are analyzed,CEO would be the highest power to decide.While key subordinate executives may contradict and restrict CEO based on the vocational development,specialty,reputation and the like such.And the checks and balances between management layers is probably the critical force to lower the earnings management level.Hence,it's practically meaningful to combine the checks and balances inside the management layers with earnings manegement,analyze its effect mechanism from different angles and provide useful references for making up for interior defects.Furthermore,considering all the business activities of economic entities are in a country's specific macro environment,its regional market performance will undoubtedly influence the enterprise internal economic behavior,so the market-oriented process is also added to the research of this paper as one of the major factors of the external environment.This paper selected the CEO checks and balances as an entry point,listed companies in Chinese A stock market from 2005 to 2014 as samples,and analyzed the relationships between senior executives' checks and balances and enterprise's earnings management level.Then,by classifying sample data according to varying degrees of marketization,we further inspected the interior mechanism under different marketization,the following results are showed.Firstly,CEO checks and balances significantly restrain the overall level of positive accrued earnings management,but not for the level of negative earnings management.Secondly,except for production operation,CEO checks and balances shows an inhibitory effect on enterprises' real earnings management.Thirdly,when it comes to a low degree of marketization,CEO checks and balances could significantly suppress the overall level of positive earnings management,but still not for the level of negative earnings management.If the degree of marketization is high,there is,generally,no evidence supporting the conclusion that positive earnings management level would be inhibited by CEO checks and balances.Lastly,for real earnings management,not including production operation,CEO checks and balances has a significant restraint effect regardless of different degrees of marketization.But CEO checks and balances only has an inconspicuous suppression effect on production operation at a lower degree of marketization,.Here are some possible innovations and main contributions of this paper.First of all,we examined the possibility that management layer engender internal checks and balances,and analyzed its function mechanism to enterprise's earnings management.This is the first time to discuss and measure the degree of management checks and balances and the effect it has on enterprise's earnings management which provide a new perspective to explain the conduct of earnings management by enterprises.Secondly,through the analysis of the power resources possessed by key subordinate executives and their ability and motivation to restrict CEO behavior,we revealed their important role in reducing corporate earnings management degree which provides beneficial supplement to the literature about management power.It will also be able to draw the enterprise's highly attention to the internal power defect.Lastly,the sample companies are classified according to the market performance,and the relationship between CEO checks and balances and enterprise earnings management are reexamined.Thus,the conclusion of our research provides a useful reference about how to improve enterprise's internal power configuration at different levels of marketization.According to the regression results of this paper,the following research revelations are found.The whole senior management team does not always have the same purpose.There will be conflicts and mutual confrontations for the sake of interests.Considering management is the command and control center of the enterprise,the shareholders shall pay more attention to internal power activities conducted by different senior executives,and make full use of key subordinate executives to restrain CEO power thus reducing the negative impact brought by malicious earnings manipulation.In addition,as the high degree of marketization of real earnings control model regression results showed,the effective external competition market cannot become internal mechanism's alternative factors at any time.Therefore,the relevant departments shall strengthen the supervision to enterprises on the basis of the rational knowledge of market function,and further standardize enterprises' economic behavior.