Research On The Choice Between Real Activities Earnings Management And Accrual-based Manipulation-evidence From Chinese Listed Companies

Earnings management is a classic topic in the field of accounting research,most of present research on earnings management focus on the accrual-basedmanipulation. In the1990s, scholars began to do research on the real activitiesearnings management. In2006, Roychowdhury developed the econometrics modelto measure the extent of real activities earnings management. Domestic relatedresearch began in2008. However there are only a small stream of studies about thechoice between the accrual-based manipulation and real activities earningsmanagement.This paper establishes a theoretical model to study the choice betweenaccrual-based manipulation and real activities earnings management, we solve forthe optimal level of the two types of earnings management in equilibrium. Then westudy the choice between accrual-based manipulation and real activities earningsmanagement through comparative static analysis, and find that, the higher the cost ofaccrual-based manipulation, the lower the level of accrual-based manipulation, andthe higher the level of real activities earnings management; the higher the cost ofreal activities, the higher the level of accrual-based manipulation, and the lower thelevel of real activities earnings management. Based on the results of theoreticalmodel and institutional characteristic in China, using data about Chinese listedcompanies from2008to2012, we empirically investigate how managers chooseearnings management method under the influence of different factors. The studyfinds that firms in a more stringent legal environment engage in a lower level ofaccrual-based manipulation, double-listed firms and growth firms engage in a higherlevel of accrual-based manipulation, firms with high cost of finical reporting engagein both types of earnings management, firms under high government interventionand firms with one year loss engage in a lower level of real activities earningsmanagement.The results of the theoretical and the empirical study show that, for the firmswith strong motivation to engage in accrual-based manipulation, the financialsupervision should be strengthened; for firms with strong motivation to engage in real activities earnings management, internal corporate governance mechanismshould be strengthened to ensure long-term development.