The Impact Of Negative Market Reaction On Earnings Management

As a means of smoothing profits of listed companies,whether it is accrual earningsmanagement,or real earnings management,need to cost.The theory of cost and benefit argues that there is a crime market in human life where criminals need to invest in the cost of criminal activities.The input of these costs is weighed against the expected return.When the input cost is higher than the expected income and the penalty,they will stop the crime,this trade-off analysis of the pros and cons,in fact,is a rational analysis.Shareholders as rational economic people,in weighing the excessive earnings management generated by the negative market response and earnings management benefits,will rationally decide whether to take action to curb earnings management.This paper introduces the behavioral economics view,firstly examines the positive correlation between executive salary growth and earnings management,and then explores the negative market reaction caused by the restatement announcement(the earnings management is paid by company with the financial restatement cost of reputation and the value of the company's decline)on the relationship between executive compensation growth and earnings management,confirming the effectiveness of shareholder involvement in corporate governance.Based on the social comparative theory and the theory of cost and benefit,this paper uses a total of 11887 research samples of A-share listed companies in Shanghai and Shenzhen in2008-2015.Firstly,it measures the degree of accrual and real earnings management of listed companies.The relationship between executive pay growth and earnings management is studied;Secondly,a total of 683 samples of financial restatements in 2008-2014 were used to study the negative market reaction of the five and seven trading days before and after the restraint.The results show that both annual growth rate of executive compensation for listed companies and the industry growth rate are significantly positive correlate with earnings management,indicating that the company executives will through the means of earnings management to improve their level of pay;negative market reaction can inhibit the real level of earnings management but there is no obvious inhibitory effect on accrual earnings management,indicating that shareholders take into account the company's future long-term sustainable development,will take measures to curb corporate executives to raise wages as the goal of self-interest behavior,but the short-term accrual earnings management inhibition lack of ability.This paper shows the logical chain of "earnings management,financial restatement,negative market reactions,shareholder's regulation of earnings management",From the perspective of market reaction to indirectly observe the cost of earnings management for the earnings management,provides a new perspective and empirical empirical data.This paper also once again reveals the relative effectiveness of China's capital market,provides the necessary evidence for China's capital market continued to improve and healthy development.