Research On Stock Investment Strategies Based On Earnings Management

Recent years have witnessed the exposure of some listed companies' financial fraud behaviors,so investors have higher requirements for the earnings quality in the disclosed financial statements.Intervention in financial reporting numbers,which is called earnings manipulation,will cause changes in earnings quality.The means of earnings manipulation can be divided into two types: earnings management and earnings fraud.The difference between them is whether the behavior is legal and within the constraints of accounting standards.Earnings fraud violates laws,regulations and accounting standards,so it has been hit hard by the regulatory authorities;earnings management does not exceed accounting standards,so it is more hidden and widespread.Empirical evidence shows that due to the existence of contract friction and information asymmetry,under the premise of self-interest of the broker,the behavior of earnings management in listed companies always exists.Previous studies have found that earnings management will cause the company's future performance to decline significantly.Other studies believe that real earnings management that meets the "earnings threshold" will have a significant positive impact on future performance because earnings management also sends positive signals to the market for future performance.Therefore,this article first examines the impact of earnings management indicators on future performance.From the aspects of separate accruals models,real earnings management models and non-recurring gains and losses items,this article selects seven representative indicators to measure the degree of earnings management,and chooses the return on assets adjusted by the industry median as a measure of future performance.The empirical tests found that earnings management agency indicators and future performance showed a negative correlation.Based on the full sample equation regression and the annual regression from 2007 to 2017,modified-Jones index,REM index(the indicator of real earnings management)and FER index(the indicator of non-recurring gains and losses items)were chosen as stock selection factors to construct investment strategies,and long-term investment income tests were conducted in the capital market.The basic idea of constructing investment strategies in this article is as follows:sort samples according to the value of the earnings management agency index,then buy a portfolio with low degree of earnings management,and sell(or avoid buying)a portfolio with high degree of earnings management in order to obtain relative investment returns.After long-term investment income tests in the capital market from April 2010 to April 2019,the modified-Jones strategy has an overall winning rate of 56.48%,an annual relative return of 2.20%,and a net value growth rate of20.02%.It has the best performance among the three investment strategies,and is higher than the growth rate of the SSE A-share index during the same period.Further research on the modified-Jones indicator found that by constructing an investment strategy based on the modified-Jones index in specific industries,the annual relative return can be increased to 3.21%,and the net value growth rate can be increased to30.67%.By combining with REM index,the annual relative return of the low-REM group of the REM-modified-Jones strategy can be increased to 7.08%,and the net value growth rate can be increased to 81.97%.By combining with the profitability indicator,the average annual relative return of ROE Group 1 of the ROE-modified-Jones strategy can be increased to 3.93%,and the net value growth rate can be increased to 31.27%.The strategy of combining the low REM group withmodified-Jones index in specific industries can increase the annual relative return to8.10%,and the net value growth rate to 94.89%.Since the regression coefficient of the modified-Jones index has a higher significance in the annual regression after 2013,the investment strategies of a single modified-Jones index,and the comprehensive investment strategies of modified-Jones index combined with other factors,are often show higher investment return after the financial year of 2013.This feature is more obvious in the strategy of modified-Jones index combined with the event of "turning losses into profits".The annual relative income of the event portfolio during the financial year 2009-2017 was only 1.27%,but the annual relative income in 2013-2017 was increased to 11.82%.Earnings management changes the earnings quality in financial statements disclosed by listed companies.The establishment of relevant models and indicators can test the earnings quality to a certain extent and modify investors' expectations of future stock prices.Investment strategies based on earnings management can achieve good returns in the capital market,proving that research on earnings management can provide a better method for establishing stock investment strategies.