Research On The Impact Of The Investigation Of The China Securities Regulatory Commission On Earnings Management Strategy

In recent years,violations and misbehavior of listed companies have occurred frequently,which has undermined the normal operation of the capital market.As the regulator of China’s capital market,the CSRC has intensified its supervision and conducted investigations on listed companies suspected of violating laws and regulations.The investigation is the inspection procedure before the penalty for violations.During the investigation,the CSRC is able to investigate and collect evidence from the company in an all-round way,which can have a sustained shocking effect on the company.The company will be closely regulated during the investigation and be subject to many restrictions on financing,facing pressure from the market,so it is bound to improve its internal governance and adjust its business strategy.Meanwhile,a large number of studies have shown that there are widespread earnings management behaviors in listed companies in China,especially those suspected of violating regulations.Therefore,based on the dynamic perspective of the change in the degree and mode of earnings management,this paper studies the impact of the CSRC’s investigation on the earnings management strategy of companies to explore the governance effect of the investigation mechanism.The listed companies(376 companies)that were investigated by the CSRC in the Shanghai-Shenzhen A-share market from 2002 to 2017 were used as experimental group,and the listed companies that were not investigated and successfully matched by the propensity score matching method(PSM)were used as control group.We used the double difference method(DID)to examine the change in the degree of earnings management in those companies.Specifically,we divided it into accrued earnings management,real earnings management and overall earnings management.In order to test the short-term and long-term governance effect of the investigation,we selected one year,two years and all the observable years before and after the investigation as the window period,and examined the changes in the degree and mode of earnings management.Further,to analyze the effects of the investigation mechanism in different situations,we discussed the differences in the change of earnings management according to firm size,ownership type,institutional environment,profitability and the punishment result.After empirical analysis,this paper comes to the following conclusions:(1)After the investigation by CSRC,the company’s accrued earnings management will be significantly reduced.(2)After the investigation by CSRC,the company’s real earnings management will be significantly reduced.(3)In the short period of one year or two years before andafter the investigation,the degree of earnings management decreased significantly.However,when all observable years were examined,the degree of accrued earnings management did not change significantly.Thus,the company’s earnings quality has not improved in the long run.(4)Compared with large-scale companies,the reduction of accrued and real earnings management of small-scale companies is more significant.Compared with state-owned enterprises,the reduction of real earnings management of non-state-owned enterprises is more significant.Compared with companies in areas with poor institutional environment,companies in areas with better institutional environment have a more significant reduction in the degree of accrued earnings management.Compared with companies have endured financial losses last year,the reduction of real earnings management of companies that made profits last year is more significant.Compared with unpunished companies,the reduction in the real earnings management of companies that were punished is more significant.The main contribution of this paper is that it studies the governance effect of the investigation mechanism from the time of investigation announcement,which supplements the research on the investigation,and enriches the research on the relationship between securities supervision and earnings management.In addition,the research findings of this paper have certain reference value for improving the supervision of the capital market and for enhancing the quality of listed companies.