| 1. Back GroundEarnings management is always one of the hottest areas of empirical accounting studies. The researches about earnings management began in west academic circles, as early as80th last century. In the long history of researches about earnings management, scholars have made profound discussions about the measurements, motivations, influence factors and economic consequences of earnings management.Basically, earnings management can be divided into two categories:accrual earnings management and real earnings management. The former means the kind of earnings management which is conducted by using all accounting methods, and the later presents the kind of earnings management which is conducted by using real economic activities. In a long time, real earnings management has not been received enough attention from scholars.In the beginning of this century, a series of shocking financial fraud leaded by ever-intensive accrual earnings management gave birth to the SOX-Oxley Act in the year of2002. The enforcement of SOX-Oxley Act, which aimed to improve the quality of listed firms’financial information, significantly constricted the accrual earnings management, but made the real earnings management sharply intensive. Meanwhile, the econometric models to measure real earnings management have been developed by Roychowdhury (2006). Real earnings management has moved from the edge to one of the hot topics of empirical accounting studies.External auditors can improve the quality of companies’financial information, and ensure its authenticity and fairness by providing the service of assurance. High-quality external auditors can significantly constrict the companies" accrual earnings management. Do external auditors lead any changes in the conducts of earnings management in Chinese listed firms? Do managers chose to carry out real earnings management which is more costly and of strong concealment to avoid supervision of external auditors? These questions all have profound meanings to investors and auditors both in practice and in theory.2. Purpose There are two main research purpose of this study.1. Find the evidence that the managers of Chinese listed firms chose to conduct real earnings management to avoid the supervision of external auditors;2. Find the changes of the relationship between real earnings management and audit quality under different institution background or in different industries.3. ContentsThere are mainly six chapters of this research:Chapter one is introduction. This chapter can be divided into four parts. The first part is a brief introduction of the background. In this part, I would like to discuss the features and real earnings management and external audit quality by going through the relative researches. The second part is the research line, in which I would give a summary of this study. The methods used in this paper are introduced in the third part and Ihe contributions of this study are mentioned in the final part.Chapter two is literature review. The literature review can be divided into four main parts. In the first part, based on the pervious researches, I give the definitions of the audit quality, accrual earnings management and real earnings management.In the second and third parts, I review and make comments on the literatures which discuss about the accrual earnings management and real earnings management. The third part is a brief summary, and in which I try to give a simple deduction of the relationship between real earnings management and external auditors.Chapter three is the theoretical analysis and the research hypothesis. This chapter can be divided into two main parts. In the first part, the possibility and inevitability of earnings management are discussed by using classical principal-agent theory and property right economics. In the first part, I also make deductions on the changes of managers’ conductions of earnings management when they face high-quality external auditors by using the consumers theory in Mice-economics. The model of minimizing cost is developed and hypothesizes are got by comparative static analysis in the second part.Chapter four is the research design and sample selection. There are mainly four parts in this chapter. This first part are detailed description of the econometric models I choose to measure the intensities of real earnings management, and the second part is an explanation of the chosen of ’Big Four’ as the proxy of high-quality external auditors. In the third part, I introduce my empirical model and the definition, measurement and expected coefficient sign of every variable. And the last part is the sample selection.Chapter five is the empirical tests and results analysis. This chapter is composed of five main parts. The first part is the demonstration of descriptive statistics. In this part, the descriptive statistics of the total research sample and sub-samples divided based on external audit quality are given. Besides, this part also demonstrates the results of T tests and rank sum tests of all variables between subsamples. The second part is the Pearson correlation matrix, in which the correlations among the dependent variable, independent variable and control variables are given and the multicollinearity of the econometric model is analyzed. In the third part, the results of OLS multivariable regressions by using only independent variable, added with years and industries and with all control variables are demonstrated and the hypothesizes are tested. In the fourth part, based on the theory of institute changing developed by North (1991), the sample is divided according to the index of marketization developed by Fan Gang (2010), and the regression of each subsample is made. My study finds that the institutional background has significant influence on the relationship between external auditors and real earnings management. Also, based on the ’structure-conduction-performance’research paradigm proposed by the structuralist school of industrial economics, the sample is divided according to the competition of industries and the regression of each subsample is also made. My study discovers that the competition of industries also has a profound influence on the relationship between external auditors and real earnings management. To make my research more persuasive, the robust tests have been taken in the sixth part. In the robust tests,I changed the proxy of independent variable from’Big Four’to ’Big Ten’ and to the industry expertise of the auditors measured by the ratio of audit fee in a certain industry. I also try to settle the endogenous problem by using ’Inverse Mill’s Ratio’ developed by heckman (1976) and the ’Propensity Score Matching’. The results of robust tests are quiet similar with the results in previous sections, meaning that my research is robust.Chapter six is the conclusion. Conclusion can be divided into three parts. In the first part, I made a summary of all the important results in this paper, and pointed out the shortcomings in the second part. The enlighten to future researches were given in last part.4. ContributionsMy study contributes to the relative fields in three ways:First, my study finds that the managers of Chinese listed companies have the motivations to conduct real earnings management to avoid high-quality external auditors, enriching the fields of auditing and earnings management.Second, by using the Chinese listed companies as research samples, I can overcome the difficulty of dividing institutions and keep focus on the formal institution, making contributions to institutional economics. Besides, my study finds the relationship between audit quality and real earnings management have changed when companies in different industries, enriching the industrial economics.Three, real earnings management is possibly a kind of managers’ opportunistic behavior, representing the agent-responsibility has not been properly carried out. So, the expansion of the functions of audit is necessary and urgent. |
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