The Impact Of Earnings Management On Firm Value Based On Income Smoothing

Earnings management has been always one of the most important issues inaccounting research. Under the continuous development of the economy, the maturingcapital market, the reform and improvement of the system of accounting, earningsmanagement is still a lingering problem. Earnings management has two sides, themoderate earnings management in line with the regulations is a reasonable use of thediscretion conferred Accounting Standards, and the excessive use of earningsmanagement will harm the interests of the majority of investors, so do the long run ofbusiness and society for the Inefficient of allocation of resources. Thus，earningsmanagement should not be permitted. Therefore, it is necessary to study the impact ofearnings management of corporate management on the firm value. It will help us tohave a better understanding of earnings management, and also conducive to superviseor limit on earnings management. This paper first reviews the research on theearnings management and firm value, and finds that in the study of the relationship ofearnings management and firm value, most of studies are focus on the relationshipbetween income smoothing and firm value. Income Smoothing is one of themanifestations of earnings management, it is considered to be a good manner formanagers in order to reduce the volatility of reported earnings, make the reportedearnings more stable, more reliable and more persistent. It can transmit managers’private information to the investors. In such way, managers influence the degree ofinformation asymmetry and the quality of reported earnings through earningsmanagement, and want to improve the value of the firm. Base on the usefulness offinancial report, investors use the information they obtained to estimate the value ofthe firm, if they do not have enough effective information or the reported earnings donot reflect the situation correctly, they will be misled. Therefore, the managers havethe motivation for earnings management to smooth earnings, in order to attract theattention of investors, to have a higher assessment value, thus increasing the marketvalue of the enterprise. However, the studies have not yet reached the same conclusion. Recently, scholars point that the critical factors which must be consideredare the degree of information asymmetry and earnings quality. This article useresidual income valuation model, combined with the linear information dynamicsmodel to analysis the process of investors to estimate the equity value. Whenconsidering the degree of information asymmetry and earnings quality, therelationship of earnings management and firm value become clearer. And then usethese two factors as a criterion to classify samples firms, test the impact of earningsmanagement behavior on firm value for different types. However, the empiricalresults and theoretical analysis results are not entirely consistent. Using EMsmmothtomeasure earnings management，in the case of poor earnings quality, earningsmanagement have a positive impact on firm value, but not yet very notable. Andwhen the firms have good quality, earnings management has a negative impact onfirm value. In particular, when the degree of information asymmetry is high, thenegative impact is very significant. These results have been proved regardless oftheoretical analysis or empirical test. When then use EMcorrelationto measure earningsmanagement to test the relationship of earnings management and firm value, most ofthe results are same as before. But for a high degree of information asymmetry, poorearnings quality firms, the results of regression analysis of the test is opposite,earnings management on firm value is still negative. Finally, this paper analysis thereasons for the differences, and assume a possible direction of the development aboutthe type of firms in China, it pointed out that China’s listed companies will be havelow degree of information asymmetry with investors, and high quality of reportedearnings.