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

By Jing‐Ming Kuo, Lutao Ning, Xiaoqiu Song. 2014

121 citations recorded by the source corpus.

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.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/3dc3ccb1d8929403d16c1ffa487c798c0f1989bd

How researchers see this paper

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In Accounting

1. A. Gerged
2. Khaldoon Albitar
3. Lara Al-Haddad
4. Mark R. Whittington

In Strategy and Management

1. A. Gerged
2. Khaldoon Albitar
3. Lara Al-Haddad
4. Mark R. Whittington

Citations in the corpus

• The impact of corporate governance mechanisms on real and accrual earnings management practices: evidence from Jordan (2019, background): “…“The Expropriation-of-the-Minority Shareholders Hypothesis" argues that when ownership structures become more concentrated, controlling shareholders may act opportunistically against the interests of minority shareholders to increase their private wealth (for example, Lemmon and Lins, 2003).”
• Corporate environmental disclosure and earnings management—The moderating role of corporate governance structures (2021, result): “Consistent with prior studies, such as Hayes (2009) Zang (2012) Kang and Kim (2012), Goh, Lee, and Lee (2013), Kuo, Ning, and Song (2014) Al-Haddad and Whittington (2019) Gerged, Al-Haddad, and Al-Hajri (2020) the mean value of EM proxy in this study is just about zero, suggesting that the model…”