Earnings Management Through Real Activities Manipulation: Evidence From Chinese Listed Company

Earnings management of listed companies are not only through accrual items but also manipulating real activities. In order to cross the threshold of earnings target, they employ price discounts to temporarily increase sales, overproduction to report lower cost of goods sold, and reduction of discretionary expenditures to improve reported margins.There are two most popular methods to measure earnings management. One is examining the special incentives of earnings management by analyzing the frequencyThe existing methods to measure earnings management fall into two major categories: distribution test method and accruals separation method. Distribution test method is usually used to examine special incentives to manage earnings while accruals separation method is usually used to determine the size and extent of the earnings management. But both of mem are not suitable to examine the earnings management through real activities.Based on the research of Suguta, this paper finds a way to analyze the manipulation of real activities of Chinese listed companies which have the incentive to avoid being delisted and refinance through the stock market.It shows that companies having the risk of being delisted have abnormal high production cost and abnormal low expenditure, which means that mis kind of companies has the suspicion of managing earnings through real activities. There is no sufficient evidence to support the hypothesis that companies with the incentive of refinancing manage earnings through real activities.