The Impact Of Accrual And Real-based Earnings Management On Cost Of Equity Capital

Corporations using accrual and real-based earnings management activities can adversely affect the transparency of market information,and investors who may predict of this would greatly increase the likelihood of their adverse selections,and also raise the rate of return on investment,which leads to the reduction of capital market resource allocation efficiency.This problem is particularly serious before the split share structure reform,when the coexistence of tradable shares and non tradable shares results in a phenomenon of "same shares with different rights,same shares with different price".Under this inequality situation,large shareholders' "tunneling" behaviories have aggravated the deterioration of information transparency,which greatly reduce investors' confidence in the capital market.So,whether the implementation of the split share structure reform can reduce the above behavior so as to improve the investment environment of the market and rebuild the capital market investors' confidence?To answer this question,this paper employs the implied cost of equity capital that can better present the expected rate of return of investors as the proxy variable of firm's cost of equity capital,and then explores the impact of accrual and real based earnings management on the cost of equity capital.On this basis,we use the split share structure reform as the adjustment variable to investigate the change in the impact after the reform.This paper investigates the above question by theories analysis and empirical tests.Firstly,from the aspect of the theoretical framework of the asymmetric information and the cost of equity capital,we describe the working mechanism through which earnings management impacts a firm's cost of equity capital;secondly,we analyse both agency problems between management and owner and between large shareholders and small shareholders before the reform;finally,using a large sample from 2003-2013 of all A shares on the main board of listing corporations,we estimate the implied cost of equity capital by the OJ model,and establish OLS models for empirical tests.To summary,three conclusions are obtained as follow:First,the implied cost of equity capital is positively related to the extent of a firm's accrual earnings management and real earnings management,which means it will be costly for a firm to manage the surplus as the implied cost of equity capital will at the same time increase.Second,the sensitivity coefficient of implied cost of equity capital to accrual earnings managementt are larger than the real earnings management,which shows that on one hand,real earnings management activities are hidden to find,and on the other hand,investors in China are lack of awareness of firms' real earnings management activities.Third,after the split share structure reform,investors have increased their confidence in the capital market.Compared to the time before the split share structure reform,while assuming the extent of accrual and real earnings management to be at the same degree,the implied cost of equity capital shows a lower sensitivity to accruals earnings management and real earnings management.