Securities Exchange’s Comment Letters On Annual Report And Corporate Earnings Management

In recent years,the CSRC has repeatedly emphasized the “first-line supervision” function of stock exchanges,including strengthening the supervision of information disclosure of listed companies.Among them,the comment letters on annual report is an important measure to supervise listed companies’ annual report.Through inquiring risk information of the annual report,it not only has a supervisory effect on the information disclosure behavior,but also guides the market.In recent years,the comment letters on annual report has been characterized by openness and transparency.Since the Shenzhen Stock Exchange began to publicly disclose the comment letters on annual report in 2015,the scope of comment letters has been continuously expanded,the intensity and frequency of the inquiry have been gradually strengthened,and the regulatory environment faced by listed companies has become more and more strict.Among them,a large number of annual report enquiries ask questions about the earnings quality of listed companies.The earnings management behavior of listed companies is widespread,which aggravates the information asymmetry between the company and investors.Under the background of strict information supervision,the impact of the comment letters of annual report on the earnings management of listed companies is worthy of further study.This article takes comment letters on annual report from 2014-2016 year as the research object.We proxy earnings management by accrued earnings management,non-recurring profit and loss management and real earnings management.These three proxy variables identify the impact of the annual report comment letters on companies’ earnings management behavior,and test the regulatory effect of the annual report comment letters.In addition,this paper further considers the impact of the heterogeneity of comment letters(including the number of questions and the number of income-related questions)and the heterogeneity of the inquired company on the relationship between comment letters and earnings management.The study found that the comment letters on annual report has a restraining effect on the accrued earnings management and non-recurring profit and loss management of listed companies,but at the same time,the level of real earnings management has increased.This shows that in the context of strict regulatory environment,managers avoid the earnings management method with higher regulatory risk and switch to real earnings management with stronger concealment and lower risk,so that the company’s overall earnings level remains dynamically adjusted.In further research,it was found that the more the number of total problems and income problems,the stronger the inhibition of accrued earnings management and non-recurring profit and loss management,but the real earnings management did not increase significantly.In addition,compared with “low-risk” companies,“high-risk” companies have significantly reduced accrued earnings management and non-recurring profit and loss operations after receiving annual report enquiries.The larger the company,the stronger the suppression effect of the accrued earnings management and real earnings management.What’s more,the listed companies audited by the Big Four accounting firms have significantly reduced the level of accrued earnings management.Based on the background of China’s regulatory system,this paper studies the impact of annual comments letter on the earnings management behavior of listed companies,enriches the research on the relevant fields in China,and expands the research on the effectiveness of supervisory measures.At the same time,this study supplements the effect of non-punitive regulatory measures represented by the comment letters on corporate earnings management,and enriches research on the external governance mechanism of earnings management.