Several Essays On Earnings Management

In the late1990s many Chinese scholars began the studies on earnings management. Muchevidence from Chinese listed companies has been found which focus on following issues：(1) evidenceof acrual earnings management from China’s accounting-based regulation of IPO/SEO/Rights Issue；（2）Studies on accrual earnings management of listed companies with small Profits or under specialtreatment;(3) the study on the relationship between the accrual earnings management and auditingopinion;(4) the study on the relationship between the accrual earnings management and corporategovernance. In addition to accrual earnings management, many world renowned scholars have recentlystimulated further research into real earnings management and classification shifting earningsmanagement while researchers pay more attention to mutual relations among them. Jensen’s newtheory also set an explore research to the development of impact of equity’s valuation on earningsmanagement while in the past a lot of research focused on impact of earnings management on theequity’s valuation.In the real world more evidence about earnings management should also be needed by ChinaAccounting Standards Committee and Securities Regulatory Commission which should be needed toreconcile conflicting findings on the economic consequences of earnings management. So this article ismainly about the evidence and economic consequences of several important queries about earningsmanagement. The main topics in this thesis are as follows:(1) Discussion of Economic consequencesof real sales competitive behavior;(2) Earnings Management Using Classification Shifting fromA-Share Listed Companies: An Examination of relationship between Nonrecurring Losses and Coreexpenses;(3) Discussion of mechanisms through which CFO can be managed based on ouridentification model;(4) Discussion of the Relationship between earnings management and equityvaluation. Then it draws the following conclusions: 1. Based on our understanding of real sales competitive behavior we study economicconsequences of real sales manipulation and the following results are shown by our research. Amongfirms reporting small annual profits which was profitable firms in the last year but not loss firms I findevidence consistent with managers using sales manipulating to avoid reporting annual losses.Thepressure of market competition will increase enterprise’ real sales competitive behavior. Increasing realsales competitive behavior of non-meager profit firms of manufacturing industry would be beneficial tokeeping competitive advantage. And meager profit firms of manufacturing industry which haveearnings management motivation take excessive real sales manipulation which would offset most of itspositive effect of keeping a competitive advantage.However this does not mean that more real salesmanipulation produce negative influence on future operation performance. We also conform that theoperation performance would reverse in next time if more premature discretionary revenue is taken thistime.2. Following McVay (2006) this study demonstrates and examined earnings management usingclassification shifting which classifies some core expenses as non-business expenditures after thepromulgation of new accounting standards. Consistent with our theoretical analysis we don’t validateearnings management using classification through the samples of all merger profit firms and all listedfirms.However we find a certain type of merger profit firms which will use the classification of itemswithin the income statement. The unexpected core earnings of.such companies in year t is examined tobe increasing with non-business expenditures in year t, and the unexpected change in core earnings inyear t+1is examined to be decreasing with non-business expenditures in year t.3. We use analysis of articulation to explain the two methods through which CFO can be managedand build our identification model based on the specific dynamic characteristics. The reported cashfrom operations in the statement of cash flows is divided into six categories and the result is shown byour logit regression model. The results showed that A-share listed companies will choose "other"category to inflate cash flow from operations which is through manipulation of Accounting Standardsbetween2001and2006.No significant evidence is shown that the A-share listed companies will choose the "sales","tax","rent","staff" four categories to inflate cash flow from operations. Poor performancecompanies and other companies will both choose "purchase" category to inflate cash flow fromoperations which is business management. The result of our identification model is more robust thanthe result of mean test and provides references for the related theoretical research and policy options forthe management of cash flow from operations.4. The Jensen’s new theory gives us a new perspective which has enriched the literature of therelationship between earnings management and equity valuation. The significant correlations andco-integration relations between the accrued earnings management and the A-share index in1998and2008are shown by our research. It provides new evidence of the link between overvaluation andearnings management. To explain the relationship between them we establish a simple theoreticalmodel which vividly picture how manager choose rational earnings management according to theirrational price behavior of stock market.