Earnings Management, Asset Restructuring, and the Threat of Exchange Delisting in an Earnings-Based Regulatory Regime

19 Pages Posted: 15 Sep 2010

See all articles by Peng Cheng

Peng Cheng

Xi'an Jiaotong - Liverpool University - International Business School Suzhou

Walter Aerts

University of Antwerp

Ann Jorissen

University of Antwerp - Department of Accounting & Finance

Abstract

This study examines the effect of an earnings-based listing regulation on corporate financial reporting management. In 2001, China revised its listing standards requiring compulsory stock suspension for firms reporting three-year consecutive losses. Suspended stocks are further delisted if they continue to report losses in the year of stock suspension.

Our results show that firms approaching the delisting procedure use more earnings management, although the effect is minor. Meanwhile, we observe that delisting risk induces extensive performance-enhancing asset restructuring activities. For firms turning losses into profits, our evidence suggests a negative relationship between earnings management and asset restructuring.

This study extends the earnings management literature by suggesting that earnings management to avoid losses is likely to increase with the severity of the losses and decline with asset restructuring activities. In addition, this research adds to the literature on the economic consequences of the delisting process.

The study provides evidence that an earnings-based delisting regulation is a double-edged sword which leads to either earnings management or performance-enhancing asset restructuring activities. By pointing out the earnings management and restructuring effects of the Chinese delisting regime, we may inform policy makers of the economic consequences of an earnings-based regime. This adds to prior evidence on the effects of market-based delisting thresholds. In addition, the study highlights that the earnings-based delisting regulation does not create a level playing field, since state-controlled firms are at an advantage to use more government-led asset restructurings through state-owned shareholders in order to avoid delisting.

Suggested Citation

Cheng, Peng and Aerts, Walter and Jorissen, Ann, Earnings Management, Asset Restructuring, and the Threat of Exchange Delisting in an Earnings-Based Regulatory Regime. Corporate Governance: An International Review, Vol. 18, Issue 5, pp. 438-456, September 2010. Available at SSRN: https://ssrn.com/abstract=1677096 or http://dx.doi.org/10.1111/j.1467-8683.2009.00780.x

Peng Cheng

Xi'an Jiaotong - Liverpool University - International Business School Suzhou ( email )

26 Xianning W Rd.
Dushu Lake Higher Education Town
Suzhou, Jiangsu Province 215123
China

Walter Aerts

University of Antwerp ( email )

Prinsstraat 13
Antwerpen, B-2000
Belgium
003232654110 (Phone)
003232654064 (Fax)

Ann Jorissen

University of Antwerp - Department of Accounting & Finance ( email )

Prinsstraat 13
Antwerpen, B-2020
Belgium
00 32 3 220 40 92 (Phone)
00 32 3 220 40 64 (Fax)

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