The Impact Of Large Shareholders’ Control On Real Earnings Management

This paper examines the impact of large shareholders’ control on real earnings management. In China, large shareholders have a vital influence on management decisions in the listed companies. They have strong incentives to gain private benefits of control. Roychowdhury (2006) found that besides accruals-based earnings management, there exists real earnings management. With the help of the choices of accounting policies and estimates,accruals-based earnings management usually adjust net income, resulting in accruals reversal. And real earnings management changes the actual operational activities. Restricted by the financial elasticity and under more and more heavily regulation, the space of accruals-based earnings management becomes compressed, while the listed companies prefer to real earnings management. As a new concern, with diversified ways of implementation, real earnings management exerts more baneful influence on the listed companies comparing to accruals-based earnings management. On the basis above, the effect of large shareholders’control on real earnings management not only has the practical significance,but also makes up for the lack of related literature and opens up new perspectives for further study. Besides, this study will make the research system more complete.This paper selects in total11135data from2076listed companies through2003to2012and examines the impact of large shareholders’control on the degree of real earnings management. Further more, it also examines the impact of large shareholders’control on the degree of invisibility of earnings management.It is demonstrated that companies with more powerful control of large shareholders are associated with higher degree of real earnings management,tending to upward real earnings management. Since large shareholders prefer grabbing the interests as much as they can in a safer way, they will take the advantage of real earnings management.What’s more,large shareholders’interests are highly correlated with the response of the market.So they prefer to choosing upward real earnings management to send good messages to the market.The further study finds that the more powerful control of large shareholders have in the listed companies,the more hidden earnings management behavior will be taken.Because there exists the trade-off between real earnings management and accruals-based earnings management,large shareholders will take consideration of the cost and risk of both methods.In need of hidden the activity of grabbing benefits of control,large shareholders prefer real earnings management to accruals-based earnings management.As above,the control of large shareholders will lead to the change of activity space.Hence,there should be strict supervision on the real earnings management and the control of large shareholders.And the external regulatory bodies should take further steps to strengthen the protection of the interests of minority shareholders.With some measurement limitations,this paper contributes to making up for the lack of related literature and opening up new perspectives for further study. What’s more,with the help of the invisible degree of earnings management,it examines the effect of large shareholders’control on the change of activity space.Besides, this study will make the research system more complete.