Research On Earnings Quality Of Chinese Manufacturing Corporation Based On Structural Equation Model

With the rapid development of the securities market in our country, people are gradually realizing that the earnings quantity does not explain the inherent quality of accounting surplus and its growth potential, as a result, they begin to analyze the earnings quality of listed companies. The measure of earnings quality is beneficial for companies to have a correct understanding and evaluation of their own, also, it helps investors make more reasonable decisions, and in this way, guide the rational flow of capital and allocate resources efficiently. Moreover, earnings quality is of great significance to investors, creditors, managers and potential investors. Current measure of earnings quality is mostly from the whole securities market, however, there is a big difference in the business characteristics of different industries, mainly reflected in earnings scale, operating characteristics and development trend in the future, all these factors make the measurement of earnings quality of the listed companies differently. Therefore, it is necessary to study earnings quality of listed corporations based on one specific industry. In China’s securities market, the number of manufacturing companies is numerous, which accounts for more than sixty percent of all listed corporation, In addition, the duration of the manufacturing industry is relatively long, and its industrial added value has an important position in the GDP of the whole nation. Thus, it’s of great importance to make a research on the earnings quality of the manufacturing industry.This paper selects 515 listed manufacturing companies in China to deeply analysze the measure of earnings quality and some related problems. Based on the analysis of the research background, research significance and the comprehensive analysis of existing research at home and abroad, this paper combines the exploratory factor analysis (EFA) and the structural equation model (SEM). Firstly, using the related data in 2013, it concludes the inner structure of earnings quality by EFA, more specifically, for the manufacturing listed companies in our country, earnings quality is a comprehensive index of its ability of expansion, profit making, debt paying and cash receipt. Then, a confirmatory factor analysis (CFA) is made by a structural equation model using the 2014 annual financial data, which proves the rationality of the selected exogenous latent variables and the scientific of the relevant measurement. Besides, the model proves to be stable and applicable for the financial data of other years by using it to fit the data of 2012. Thus, manufacturing listed companies in China can use this conclusion to measure the earnings quality, and find the gap to make up by the vertical and horizontal comparison. Also, it concludes that the expansion ability and profit making ability have a higher impact on the earnings quality, because of which, company can give priority to promote the two aspects of the comprehensive ability to quickly boosts its earnings quality.Also, It’s concluded that the companies’internal factors (the release time of annual financial statements; the related party transactions; chairman and general manager by the same person) have no significant impact on the earnings quality, while the other three factors (ownership concentration degree; annual salary of directors, supervisors and senior executives; proportion of top executives) impact more, and companies can improve its earnings quality by making a change on the last three ones.The innovations of this paper are as follows, firstly, by selecting the manufacturing industry as the object of the study, the influence of industry differences are eliminated and therefore, purely analysis is made on the earnings quality of China’s manufacturing listed corporations. Secondly, it combines EFA and CFA together, analyzing the internal structure of earnings quality by EFA, and then using the SEM to make a CFA and ultimately construct the measurement of the earnings quality of the manufacturing industry in China. Thirdly, in this paper, a multi-group SEM is used to study the effects of various factors on earnings quality, which would make the result more convincing and widely applicable. Furthermore, in consideration of the data in financial statements of listed corporation is not subject to multivariate normal distribution, which couldn’t meet the requirements of SEM, this paper attempts to make a Box-Cox transformation before analyzing, by doing this, the serious non-normality of the data is well improved, and thus making the conclusion of the research more stable and reliable.This paper also has some limitations, for one thing, to ensure the comparability of sample companies, in the sample selection process, companies issued A shares and other shares at the same time are deselected, and there may be some representative manufacturing listed companies not able to enter the sample. For another, to some extent, the earnings quality may also be influenced by the enterprise life cycle phase, but due to the limitation of sample size, the manufacturing listed corporations is not been divided by their life cycle phase. And the classification criteria of the total annual salary of directors, supervisors and senior executives also exists some subjectivity.