Accrual-based and real activity earnings management at the back door: Evidence from Chinese reverse mergers

Tingting Zhu, Meiting Lu, Yaowen Shan and Yuanlong Zhang

Pacific-Basin Finance Journal, 2015, vol. 35, issue PA, 317-339

Abstract: We examine how Chinese reverse merger (RM) firms trade off and conduct income-increasing earnings management through accrual-based and real activities manipulation strategies. We find that Chinese RM firms engage in both real activities and accrual-based manipulation at higher levels than non-Chinese RM firms, regular US firms and other Chinese US-listed firms. Further analysis suggests that Chinese RM firms use real activities and accrual-based manipulation as substitutes and tend to transition to real activities management in the years after a reverse takeover. Big 4 auditors can effectively constrain both real activities and accrual-based earnings management in Chinese RM firms. We also find that accruals manipulation is more costly relative to real activities management in the short term because it predicts changes in post-acquisition operating performance in Chinese RM firms. Overall, the results provide practical implications to regulators, investors and auditors on the channels through which Chinese RM firms manipulate earnings and the economic consequence of those manipulations.

Keywords: Earnings management; Reverse merger; Accrual-based manipulation; Real activities manipulation; Firm performance (search for similar items in EconPapers)
JEL-codes: G30 G34 M41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:35:y:2015:i:pa:p:317-339

DOI: 10.1016/j.pacfin.2015.01.008

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