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

Jing Ming Kuo, Lutao Ning, Xiaoqi Song

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    44 Citations (Scopus)
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    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. ?? 2014 University of Illinois.
    Original languageEnglish
    Pages (from-to)101-136
    Number of pages36
    JournalThe International Journal of Accounting
    Volume49
    Issue number1
    Early online date4 Feb 2014
    DOIs
    Publication statusPublished - 1 Mar 2014

    Keywords

    • Accounting choices
    • Accrual earnings management
    • Emerging markets
    • Real earnings management
    • Split share structure reform

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