The Impact Of Equity Pledge On Earnings Management Preferences

In early 2020,the new coronavirus began to rag in many countries such as China,South Korea,Japan,Iran,Italy,etc.,which increased the uncertainty of the global economy and severely hindered the development of tourism,air transport,and retail industries.As a result,the stock market has suffered severe setbacks,exacerbating investor panic,and causing a bad impact on business operations.It can be said that the global emergency like the new coronavirus is just the performance of an external uncertainty factor.As China’s economy increasingly moves to the center of the world stage,more and more uncertainty factors will have an important impact on the operation of Chinese enterprises,and the concept of external uncertainty is gradually rooted in the hearts of enterprise management and investors.As an important means of financing,equity pledge is also affected by external uncertainties.First of all,this paper examines the impact of shareholding pledge on the earnings management of listed companies.It is found that equity pledge of shareholding shareholders can induce earnings management behavior of listed companies.From the perspective of earnings management,enterprises have three choices: accrual earnings management,real earnings management and classified earnings management.Further studies show that in non state holding companies,companies with equity pledge are more motivated to carry out earnings management;the higher the degree of marketization,the more obvious the inhibitory effect on earnings management behavior of equity pledge enterprises.Moreover,because of the irrational emotions of investors,such as fear of equity pledge,the stock price of stock ownership companies has dropped synchronously.The accruals earnings management of enterprises with equity pledge will aggravate the irrational mood of investors and further reduce the synchronization of stock price;because the real earnings management is more hidden,it is often hidden in the production and operation activities of enterprises and is not easy to be found by investors,so the impact of the real earnings management of enterprises with equity pledge on the synchronization of stock price is not obvious;and the existence of equity The classified earnings management of hypothecation companies will weaken the negative impact of equity pledge on stock price synchronicity,indicating that classified earnings management can effectively stabilize investor sentiment and boost investor confidence.Then,this paper considers the external uncertainties at the national level,local level and enterprise level,selects the economic policy uncertainty,local officials change and environmental uncertainty in turn,and studies the influence of the three external uncertainties on the three earnings management preferences of the existing equity pledge enterprises.The study finds that economic policy uncertainty has a moderating effect on stockholder’s equity pledge and earnings management behavior of listed companies.Specifically,the higher the uncertainty of economic policy is,the more likely the enterprises with equity pledge will reduce the accrued earnings management and increase the real earnings management.However,the uncertainty of economic policy will not affect the classified earnings management behavior of stock-pledged enterprises.That is,when the uncertainty of the external economic policy increases,the enterprises with equity pledge will prefer the real earnings management,reduce the accrual earnings management,and replace the accrued earnings management with the real earnings management,so as to reduce the earnings management cost.However,when the economic policy is uncertain,outside investors and other stakeholders do not pay enough attention to the core earnings and earnings persistence of enterprises.Therefore,the moderating effect of economic policy uncertainty on stock pledge and classified earnings management is not obvious.Further research shows that when the degree of economic policy uncertainty in the eastern region increases,the equity pledge enterprises will reduce the accrual earnings management,and replace the accrual earnings management with the real earnings management,so as to reduce the cost of earnings management;in the western region,the economic policy uncertainty has no obvious effect on the adjustment of the earnings management behavior of the equity pledge enterprises.From the side,we can see that compared with the eastern region,the market economy in the western region is still underdeveloped.According to the division of the plate,whether the small and medium sized board,the gem or other sectors,the equity pledge enterprises will reduce accrued earnings management and increase the real earnings management when dealing with the uncertainty of economic policies.The real earnings management will replace the accrued earnings management,and finally achieve the surplus target.After that,this paper draws on previous studies,taking local officials’ change as the proxy variable of the uncertainty factors at the local level.The study found that after the change of local officials,the enterprises with equity pledge will prefer the accruals earnings management and reduce the real earnings management,indicating that the new local officials may have collusion effect with their enterprises.For the new local officials,we expect to improve corporate performance in a short time to promote political intentions;and for enterprises,accrued earnings management will neither damage the future value of enterprises nor cover the interests of the government.However,when local officials change,outside investors and other stakeholders do not pay enough attention to the core earnings and earnings persistence of enterprises.Therefore,the moderating effect of local officials’ change on equity pledge and classified earnings management is not obvious.In further research,this paper distinguishes the change types of local officials from three aspects: whether the new mayor is transferred from other places,whether municipal leaders and provincial leaders are townsmen,and whether the former municipal leaders are promoted or not.It is found that the transfer of different places and the promotion of the former city level officials make the enterprises with equity pledge have stronger motivation to carry out accrual earnings management,but the effect on the real earnings management and classified earnings management is not obvious;However,whether the new municipal leaders and provincial leaders are from the same hometown has no significant effect on the adjustment of accrued earnings management,real earnings management and classified change of earnings management of enterprises with equity pledge.It shows that the transfer of local governments and the promotion of former municipal officials will make local officials more willing to collude with enterprises with equity pledge,reflecting the policy uncertainty brought about by changes in local officials and reducing the quality of accounting information of equity pledge enterprises.Finally,the environmental uncertainty is chosen as the agent variable of the external uncertainty factors at the enterprise level.It is found that when the environmental uncertainty increases,firms with equity pledge will also increase accruals earnings management,real earnings management and classified earnings management.The result shows that under the intense market competition environment,the performance pressure of enterprises with equity pledge is even greater,and the management of enterprises is forced to release the signal of good operation condition through earnings management.In other words,in order to weaken the impact of environmental uncertainty and improve the stock price of secondary market,the enterprise management would rather bear the litigation risk,sacrifice the future value of the enterprise,and constantly strengthen the core surplus,so as to win the favor of investors in the competition between enterprises and solve the crisis of equity pledge.In the further study,the industry concentration degree and the financing constraints of enterprises are considered.The study found that if the industry concentration is high,that is,the competitive advantage of enterprises is obvious,and in the face of the impact of environmental uncertainty,enterprises will prefer to meet earnings expectations of external investors through accruals earnings management and real earnings management.If the industry concentration is low,that is,the competitive disadvantage of enterprises is obvious.Under the pressure of peer competition,enterprises prefer to change earnings management through real earnings management and categorization to cater for investors’ earnings expectations.The study also finds that firms with low financing constraints tend to prefer real earnings management when facing environmental uncertainty,followed by classified earnings management,and accrued earnings management.However,firms with high financing constraints tend to prefer accrued earnings management,followed by real earnings management,and are not sensitive to classified earnings management.It can be seen that enterprises with severe financing constraints are willing to bear certain litigation risks when facing the impact of environmental uncertainty,so as to get rid of the unfavorable financial situation as soon as possible and reduce the possibility of the equity pledge crisis.