Real Earnings Management, Manipulation Incentives and Accounting Conservatism:Evidence from China

ABSTRACT

This study examines the effects of real earnings management on accounting conservatism, based on 2,121 A-share listed firms in Shanghai and Shenzhen from 2005 to 2017. The results indicate that real earnings management has a significant negative impact on listed firms’ accounting conservatism. The real earnings management based on loss avoidance, seasoned equity offerings (SEO), maintaining growth and reversing loss reduces accounting conservatism, while that based on earnings smoothing incentive improves accounting conservatism. Real earnings management of firms with poor corporate governance has a more significant impact on accounting conservatism than firms with good corporate governance. The findings also offer reference for further strengthening listed firms’ financial supervision, improving corporate governance structure, and promoting the healthy development of the securities market.

KEYWORDS:

• Real earnings management
• accounting conservatism
• incentive
• corporate governance
• accounting regulatory environment

Acknowledgments

We acknowledge financial support from the Natural Science Foundation of China (no. 71573056).

Notes

1. Detailed procedures are available upon request.

2. Before that, we find that there is a complementary relationship between real earnings management (RM) and accrual-based earnings management (DA) in China, which means if companies engage in more accrual-based earnings management activities, they are also more motivated to engage in real earnings management.

3. Detailed tables of heterogeneity tests are available upon request.

4. Detailed tables of the test based on PSM are available upon request.

5. Detailed tables of other robustness checks are available upon request.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71573056].