Political Costs And Real Earnings Management Research

Earnings management is a hot topic highly concerned on the Chinese stock market, which becomes one of the frontier subjects of modern accounting. Existing earnings management studies focus on the gray areas of accounting standards. That is, focusing on accruals earnings management, which manipulates earnings information through the different options for accounting procedures that have not been banned in accounting standards. However, with the outbreak of a series of accounting scandals, flexible choice of accounting policies and the accounting estimates are considered to be the culprit behind.Post-Enron era, the manipulation of accruals is easier to attract the attention of the audit and the securities regulatory authorities; while after the enactment of SOX, global enterprise accounting system has changed, which also changed the relative cost of surplus management. In order to pursue cost minimization and achieve maximum benefit, companies gradually turning from an accrual-based earnings management to actual transactions-based earnings management to achieve its earnings goal. Real earnings management is hard to be distinguished by constructing actual transactions which are similar to normal production and business activities, but the transactions deviate from the best decisions, and because of the acts involving corporate real trading activity, thus affecting all levels of public disclosure, while earnings will have a greater impact on the company’s cash flow.Extensive literature researches have confirmed that the company’s management are based on a variety of earnings manipulation motives, which include capital markets motives (IPO, SEO, keep earnings, avoid delisting turnaround), contract motivation (executives change, debt covenants, dividend plans) and the political costs motives (antitrust monopoly regulation, tax avoidance, the industry regulator), etc. A more comprehensive study of earnings management motivation theory can be seen, which encompasses almost all aspects.However, political motivation-based research is relatively rare. Political cost assumptions considered when other conditions do not change, the higher political costs companies face, the greater possibility of earnings management manipulate through postponing surplus recognition from current to future periods.For some companies which are larger and earn higher, attract more focus from investors and consumers as well as a variety of controls from the government, such as antitrust regulators, the tax regulation, and the industry regulator, increasing the level of taxation, introducing more regulations over such companies to make them assume corresponding social responsibilities, which results an increase of their political costs. Therefore, managers under political pressure, in order to meet the wishes of the public and the government to reduce suffered attention, they have the motivation to manipulate earnings.In China, the real estate industry has become an important pillar industry which has great relationship with the domestic economic development and the people’s livelihood.The development of real estate is not only one of the important forces driving GDP growth, but also the strength leading to the development ofa series of other related industries upstream and downstream such as iron and steel, construction, decoration industry, cement industry and so on. It also stimulates and releases the consumer demand of our residents, which expanding domestic demand greatly. It also becomes an important driving force for urbanization process in China. In2008, the domestic economic situation presented downturn and the house price fell down by the impact of the financial crisis. Thus, the government implemented a series of policies to support the real estate such as increasing credit lines and reducing the corresponding taxes in order to actively expand domestic demand and ensure sustained GDP growth, which resulting in the significantly rise of trading volume, speculative demand and skyrocketing housing prices in the real estate market and thus bringing instability to the society. Therefore, the state macro-control targets by the end of2009gradually turning to curb housing prices. Especially in2010, which has been called "the most severe year in the history of real estate macro-control ", a series of regulatory policies frequently been introduced to combat speculation and curb housing prices. Subsequently, the policy becomes more overweight,"the new state eighth","State eleventh", the land market "state fifth " are constantly been introduced to regulate the real estate market from land market policies, credit policies and tax policies. Credit limits and purchase limits indeed cause adversely affect to the volume of housing trade, and most of the buyers go into a state of wait-and-see. This study aims to address the following questions. Do China’s listed real estate companies consider real earnings management to reduce attentions from the public when they face such a high political cost?In this paper, research ideas areas the following:firstly, sorting out the definition of earnings management and domestic political costs, distinguish two ways of earnings management from the definition and their means. Conducting a literature review, which contains literature study on earnings management choices and its motivations driving by political costs, with the expectations of a more comprehensive and macro grasp of the domestic and foreign research progress, current situations and future research trends in this area,which may offer research inspiration and ideas for this study. This chapter consists of three parts:First, combing and define concepts, including the concept definition and the definition of the political costs and two earnings management; Second, the existence and selection of real earnings management; Third, the relationship between politic costs motivation and earnings management. Research ideas of this paper have come into being by the above literature reviewing, which also provides a large literature support for the research of this paper. Secondly, this paper explored the theoretical roots of earnings management to indicate the possibility and inevitability of the existence of earnings management, thus, analysis earnings management motivations caused by political costs. Finally, analyzing the political costs of listed real estate companies face in terms of the formation of the land policies, tax policies and financial policies.To derive what real earnings management behavior may exist, put forward the hypothesis in this paper. By referring to foreign research theories and econometric models, make empirical research on the real estate business validating relationship between earnings management political costs. Analyzing descriptive statistics, variable correlations coefficient test respectively and multiple linear regression of the study sample respectively. Finally, after the above analyzing, draw an overall conclusion for this paper. Then, make recommendations for listed companies and the government respectively, and outline the limitations of this study and proposes further study directions.The main text of this article includes the following six chapters:The first chapter is the introduction, propose the main question to be studied from the background research, analysis the significance of this study, explore effective methods to conduct research and indicate the contribution of this paper.The second chapter is a literature review of relevant literature. Sort out the definitions of two ways of earnings management, including the definition of related concepts, the choices real earnings management and political costs associated with real earnings management. Analysis of the inspiration and experience for reference from literature review come the last.The third chapter is the theoretical analysis of earnings management. Analysis starts mainly from the theoretical roots of earnings management, that is, agency theory and the subsequent development theory:contract theory and asymmetric information theory to explain the possibility and inevitability of earnings management. From the neoclassical economics and consumer theory, this paper consider that the managers will choose the way of earnings management from the perspective of utility maximization minimum cost. Finally, analyzing the political cost motivations of earnings management shows that the political costs would lead to earnings management.The fourth chapter analyzes the political costs that the real estate companies may face because of the macro-control policies and real earnings management methods real estate companies use.The fifth chapter is empirical research. Include study designation and empirical analysis. This paper explains the sources and selection of study sample and defines the relevant variables through theoretical analysis to derive hypothesis. And finally build the regression model to analyze the results of research.The sixth chapter is conclusions, policy recommendations, and possible insufficient of research and research prospects. After a series of theoretical analysis and empirical test, we can draw the conclusions and propose some recommendations for the enterprise and government sectors respectively. Finally, outlines the limitations and shortcomings of this study and further prospects of new directions.This research found that:China’s real estate listed companies’political costs have significantly positive correlation to downward real earnings management and significantly negative correlation to upward. The greater the political costs, the higher level the degree of downward real earnings management, the lower level the degree of upward real earnings management. Compared to the state-owned listed companies, non-state-owned listed companies have stronger negative earnings management motivation. At the meanwhile, adding accrued earnings management as a simple complementary control variable in regression models, we found that companies have greater flexibility in choosing specific earnings management when face different incentives and management purposes, the two ways are not only alternative or supplement relationship. This is due to changes in the external regulatory environment, which has led to the increase of costs of accrual earnings management increases. However, real earnings management also cost highly because of the difficulty of its implementation, therefore, companies must make a comprehensive choice when faced with different targets following cost-effective principle.This study makes several contributions to the literature on earnings management, especially enriches studies based on real earnings management of domestic political costs motivation, which may expansion existed research fields and provide the appropriate reference to future study. Use macro indicators as proxies for political costs to avoid the limitations of using enterprise scale. The choices of two specific earnings management have also been examined at the same time.There are a number of limitations to this study. First, we focus only on the high political sensitivity industry-the real estate industry, may affect the conclusion to be widely applicable, sample data remains to be abundant. We created new variables as proxies for political costs that have never been used in previous studies may be thoughtless. Econometric models are totally from foreign study may lead to inaccurate of the conclusion. In this paper, we use three methods, sales, production and cost control to measure the extent of real earnings management, ignoring other methods, may be uncomprehensive. Meanwhile, the classic research model for the Chinese foreign capital markets whether have special applicability or not remains to be confirmed, it also leaves great space for further innovation.