The Research Of Banks’ Identification On Earnings Management

Enterprises have many reasons to operate earnings management, such as taxation avoidance, the raising of capital and avoidance of debt contract constraint and the obtaining of political capital. Entering into the21th century, the problems on accounting earnings management are especially outstanding, mainly those earnings manipulation out of private reasons. The violent distortion of financial reports of listed companies has been existed for a long time.In the past, the research on this area mainly focused on the "accrued earnings management". The deepening research have brought researchers into a new kind of earnings management, the operation of chargeable items and transaction to change the "real" performance of enterprises, which is called the "real earnings management". Compared with the manipulation of accrued items, managers prefer to manipulate the real operating activities to adjust earnings, which are more secret and confusing, and will always bring serious consequences to the follow-up performance of the company.Although the reform of marketization is driving fast in the right direction, the effect of reform on credit risk of banks, along with the capability of identifying companies’earnings management should bring more attention and breed more researches. If banks could identify or partly identify the accrued and real earnings management, the controlling measures on credit risks are proven effective, so we should make out relevant policies and adopt effective measures to improve it. Or else, we should take more efforts to achieve this goal, which implies the significance of the current research.This paper contains the following aspects:Firstly, introductions. It mainly includes the background, significance, content, method, the way of thinking and innovation of research.The second chapter is literature. We make the outline of relevant researches, mainly including the literature of earnings management, accounting information and banking credit contracts, earnings management and banking credit contracts.The third chapter contains the theoretical analysis and hypothesis of research. The first part comes with the sum of theories, including debt contract theory, and information asymmetry theory and accounting information quality theory. Then we use hypothesis in different situations. The hypothesis includes the identification of banking interest rates and the new debts on earnings management, with accrued and real earnings management being the hypothesis respectively.The forth chapter is the design of research. This contains the selection of variables, definitions and the construction of models. The dependent variables in this paper are the loan rates and new debts, while independent variables are accrued and real earnings management, and several controllable variables. We construct research models in line with the hypotheses respectively.The fifth chapter is the empirical research, including descriptive statistics, Person relevance analysis and multiple regression analysis. We carry out regressions on the above four models and three sub-indices respectively, display the results in one chart, and do stability tests with different earnings management methods.In the sixth chapter, we display the conclusion, contribution, suggestions and further research directions.The conclusions are as follows:Firstly, real earnings management activities of listed companies exist in China. The usual manipulative methods includes that of production costs, expenses, and cash flow.Listed companies will always make comprehensive use of the above three methods, but with different frequency and to different extents. In fact, the manipulation of cash flow contributes most to the real earnings management, the reason of which may come down to the limitation of use of money and location of other two.Secondly, banks can identify the accrued earnings management of borrowing companies both in the process of deciding interest rates and lending out new debts. The loan rates are significantly correlative with accrued earnings rate. The new debts have significant negative correlation with the real earnings management.Thirdly, banks can identify the real earnings management of borrowing companies, apart from in the process of deciding interest rates. The new debts have significant negative correlation with the real earnings management. The loan rates have no correlation with real earnings rate.Fourthly, banks have limited abilities on the identification of earnings management of borrowing companies. Banks should strengthen the defense of credit risks, and adopt effective measures to improve it.Following suggestions are put up to improve banks’ abilities on the identification of earnings management:Firstly, banks should strengthen the check on loans.Secondly, banks should strengthen supervision and management.Thirdly, we should speed up the pace of completion of accounting information exposure system.Fourthly, we should complete relevant laws and stipulations.Fifthly, we should cultivate the faith culture.The contributions are as follows:Firstly, we make further researched on the identification of banks on real earnings management.Secondly, we adopt a more reasonable method of assigning serial numbers. We follow the thinking of past researches and use serial numbers rather than absolute numbers. Because of the possible non-linear relations between measuring indices such as the controllable accrued items and loan costs, we use the serial numbers to avoid the bias.Limitation is as follows:We follow foreign models to measure the level of real earnings management without the consideration of scientific level and applicability. We only consider the rates and new debts without the consideration of other variables such as terms, patterns of lending, including credits, guarantees and mortgages, out of limitation in the banking loan contracts.In summary, the further research directions are as follows:The further research of the organization of sub-indices of real earnings management to consider the applicability of foreign models and to get a clearer sight of real earnings management of listed companies in China.We may try other variables such as the terms and patters of lending.The new accounting criteria may change enterprises’ way of earnings manipulation. Future researches may focus on the selection and combination of accrued and real earnings management.We may consider the influence of financial environments.