| After our market-orientated reform running through several phases, as well as the adoption of more flexible accounting systems, a problem begins to rise--- do our public companies begin to select specific accounting policies to achieve certain purpose? That is to say, do the public companies conduct earnings management behaviors when they are confronted with alternative accounting policies? Aiming at more conservative reflection of the business values, in 2001, Ministry of Finance enacted assets impairment in the new "Accounting System for Business Enterprises", providing the first set of systematical rules for assets impairment accounting. An important question is raised: Did the accounting practice realize the initial goals set by the Ministry of Finance? If No.t, we would like to find the reasonable explanation.The Four Items of Assets Impairment enforced in 1999, as well as the impairment for the long-term assets in 2001, have provided us a good research opportunity to examine the earning management situation in China. The present study adopts positive approach to evaluate the effect of implementation of the related new assets impairment rules among public companies.Limited by the availability of the data, this paper restricted its research to the study on assets impairment in year 2001 and 2002 only. In addition, for the problem in long-term assets impairment, the author focused only on a special case of earnings managemen,i.e. "overly-impairing-then-gaining-from-disposal".In this study, (1) there is no. evidence supporting the "big-bath" expectation, i.e., there is no. evidence that the companies suffering great amount of loss in year 2001 and 2002 recognized impairment loss remarkably; (2) however, the companies that were close to"0 bottom-line" in year 2001 and 2002, tended to recognize less amount of asset impairment loss compared with the control group companies, indicating the possibility that those firms with small gain may exploit the ambiguity in the new impairment accounting standards to expand their earnings; (3) the companies that suffered consecutive periods of losses and the companies that had "stockholder equity per share" just over 1 RMB, tended to inflate their earnings or stockholder equity by exploiting the assets impairment accounting standards; (4) as for long-lived assets impairment, those firms that had higher financial leverage in year 2000 tended to overly impair their long-lived assets, then realize gains from the disposal of assets in the next year, even though those companies had higher return on assets (ROA) and shorter time period of being listed than the control group companies. This study may contribute to the literature in following aspects: (1) Firstly, the present study creatively uses the companies with minor losses as control group companies. This design is based on the assumption that the companies with minor lossestend to have the least motivation to manipulate the earnings.(2) Current study uses the methodology of case study providing evidence of earning management using assets impairment accounting among listed companies. Especially, after the government has taken over the "South Securities Corp." on Jan. 2nd,2004, the public-company investors recognized assets impairment in strikingly various degrees, ranging from 20% to 100%. The analysis implies that there is strong relation between the assets impairment and earning management intention. Based on these case studies, the author has drawn the conclusions that the accounting policy of assets impairment currently enforced in China need to be deliberated by adding more detailed descriptions and guides to increase the comparability of accounting information. (3) Thirdly, this paper has broadly analyzed the motivations of earning management by manipulating assets impairment and notes that the major incentives involve the fear of red "bottom-line" and of being "special treated". This analysis would provide precious advice to the capital market regulators, since the capital market could pe...
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