The Real and Accrual-based Earnings Management Behaviors: Evidence from the Split Share Structure Reform in China

Jing-Ming Kuo, Lutao Ning () and Xiaoqi Song

The International Journal of Accounting, 2014, vol. 49, issue 1, 101-136

Abstract: This paper investigates the earnings management activities in Chinese listed firms and the impact of the split share structure reform (SSSREF). We demonstrate that Chinese listed firms exhibited a long-term positive relationship between real and accrual-based earnings management activities over the 2002–2011 period. This reflects the environment of weak investor protection and lack of effective corporate governance in China. Our results also indicate that the SSSREF in China has not fundamentally improved firms' quality of financial information. This may be because ownership concentration remains high. However, it is of interest that the reform has created an incentive alignment effect exogenously. We find that firms' use of discretionary accruals was constrained, and they have consequently shifted to less detectable and under-scrutinized real earnings activities after the reform. This shift is similar to that seen with the direct regulatory changes in accounting reporting rules on firms' earnings behaviors in developed countries where the investor protection environment is strong. We suggest that firms' shifting between the accrual and real-based earnings methods is an overlooked area for investors to consider in the emerging market context, and may require the attention of regulators.

Keywords: Split share structure reform; Accounting choices; Accrual earnings management; Real earnings management; Emerging markets (search for similar items in EconPapers)
JEL-codes: G14 G15 G30 G38 M40 M41 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:accoun:v:49:y:2014:i:1:p:101-136

DOI: 10.1016/j.intacc.2014.01.001

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