Research About The Effect Of Bank Debt Covenants On The Real Earnings Management

Listed companies in China for different purposes, such as improving the stock price, additional allotment, to avoid losses or withdraw from the market and increase profits, etc., there are strong incentives to manage earnings. Because of its widespread presence in China’s capital markets and have a significant impact on stakeholders, so more and more attention are paid by the social people from all walks of life. Bank as an important financing channels, is critical to the survival and development of the enterprise. In order to reduce risk, the operation and solvency of enterprises will be strictly examined before the bank make loans to enterprises, it will inhibit the earnings management behavior of the debtor; But on the other hand, when lending bank will sign a debt covenants with the debtor, specifying the rights and obligations of both sides and putting forward some restrictive clauses, and the debtor needs to meet certain conditions to obtain the bank loan, and thus the debt contract will prompt companies to earnings management to meet the relevant provisions to avoid default costs. Then what is the relation between the bank debt covenants and earnings management? Therefore the study of debt covenants impact on earnings management will be of great significance.Existing literature of studying the relation between earnings management and debt contracts, mainly from the perspective of accrual earnings management. Accrued earnings management occurs only from the end of the year to the disclosure of annual financial reports, and is limited by previous earnings management scale. In today’s increasingly strengthen regulatory environment, accrued earnings management space is more and more small. Real earnings management is the actual business activities, with high concealment, so gets more and more favor of management.This paper is mainly divided into five parts to demonstrate the effect of bank debt covenants on the real earnings management. The main contents are: The first part is the introduction. This section mainly includes articles research background, theory significance and practical significance, relevant literature review, and a simple introduction to the main content and research framework on this basis and outline describes the innovation of this paper.The second part is the relevant theoretical analysis and hypothesis of earnings management. This part mainly introduces accrued earnings management and real earnings management concepts and manipulation methods surplus management motivation and theoretical basis and hypothesis.The third part is the research design. This part is the core of this paper, mainly including the selection of samples and data sources, the measurement of the degree of earnings management, the interpretation and definitions of variables and regression model. Sample selection is based on data from2007to2011Shanghai and Shenzhen A-share, and a certain degree of filtering and sorting. The article respectively, from the size of bank borrowings and bank borrowings maturity structure studies two aspects to study the effect of bank debt contract on real earnings management.The fourth part is the empirical test and analysis. The part is mainly for the inspection of related assumption, including descriptive statistics of each variable and robustness test, correlation test and regression analysis, test results and interpretation and analysis of results.Part fifth is the main conclusions and recommendations. This part is on the basis of the empirical test and analysis to draw conclusions and make relevant recommendations and deficiencies.Through empirical research, this paper makes following conclusions:In the presence of bank debt contract, listed companies will use three ways at the same time to carry out the real earnings management activities. In the higher scale of bank borrowings, in order to avoid default costs, there will be a higher scale of earnings management in the company. That is to say, the size of bank loans and the real magnitude of earnings management are positively correlated. The higher the rate of short-term borrowing, the larger the financial risk. In order to reduce the risk of bankruptcy, real earnings management degree will be enhanced. That is to say, the bank loan term structure is negatively related to the real earnings management.The innovation of this paper lies in:(1) the existing debt covenants impact on earnings management studies, mostly accrued earnings management is the research object, the study of real earnings management is much less. Under the condition of increasingly strengthen regulatory environment, the real activities of earnings management due to its strong concealment, can happen any time in the year to make up for the deficiency of the accrued earnings manipulation, gradually favored by managers. So based on the perspective of real earnings management, this article is in line with the development trend of theory research. In addition, most of articles just used debt scale to represent debt covenants, ignoring the influence of debt maturity structure. In this paper, debt covenants more are segmented, the study is the bank debt covenants, respectively from bank debt and the term structure research two aspects of research, more in-depth and comprehensive;(2) Accrued earnings management and real earnings management is highly relevant, this paper studies the real earnings management designed to add accrued earnings management index as a control variable, to better explain the real extent of earnings management, which is rare in previous studies.Drawbacks are this study:(1) there are many calculation model of earnings management this is modified Jones model to measure. And, in reality, there is a variety of real earnings management mean, this article just uses abnormal production cost, cash flow and abnormal controllable expense to measure. Therefore, earnings management measurement has some limitations;(2) there are many factors that can affect the real earnings management, this article only selects a part as the control variables, so it is not very comprehensive.