Legal shifts and corporate strategy: The impact of China’s New Securities Law on earnings management

Yikai Zhao, Shutong Zhang and Xinyi Geng

The North American Journal of Economics and Finance, 2025, vol. 80, issue C

Abstract: This study examines the impact of China’s New Securities Law (NSL) on real earnings management (REM) practices among listed companies. Employing a difference-in-differences (DID) approach, we find that the implementation of NSL significantly reduces REM activities. Our results remain robust after addressing concerns about unobserved confounders and a series of robustness checks. Further analysis shows that this effect is driven by enhanced internal control, improved audit quality, and increased retail investor monitoring. The reduction in REM is more pronounced in SOEs, firms with stronger board independence, abnormal audit fees, and higher executive pay. These findings highlight the policy significance of broad legal reforms beyond accounting standards in shaping corporate behavior and governance in emerging markets.

Keywords: New Securities Law; Real earnings management; PSM-DID; Corporate governance (search for similar items in EconPapers)
JEL-codes: G18 G38 K22 M41 M48 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001470

DOI: 10.1016/j.najef.2025.102507

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