Can Government Policies Induce Earnings Management Behavior? ‐Evidence from Chinese Public Listed Firms

21 Pages Posted: 26 Oct 2012

See all articles by Nan Hu

Nan Hu

Stevens Institute of Technology - School of Business

Xu Li

The University of Hong Kong

Ling Liu

University of Wisconsin Eau Claire

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management

Gao-Liang Tian

Xi'an Jiaotong University (XJTU) - School of Management

Date Written: Autumn 2012

Abstract

Earnings management behavior is a concern of standard setters, regulators, and investors. This study predicts that government policies can induce earnings management behavior. Based on a sample of 8,765 firm years ranging from 2002 to 2009, this study uses two methods to detect the effect of government policies on managers' earnings management behavior. One is the earnings distribution method developed by Burgstahler and Dichev (1997), and the other is the modified Jones model proposed by DeFond and Jiambalvo (1994). We find that policies issued by the China Securities Regulatory Commission (CSRC) can induce managers of listed firms to engage in earnings management to either avoid negative consequences (e.g., delisting) or to meet requirements (e.g., refinancing). So, although the purpose of government is to protect investors as well as to promote the healthy development of the securities market, its policies are a double‐edged sword: if there is no strict and effective control mechanism, government policies can harm investors and disturb the normal order of the securities market.

Suggested Citation

Hu, Nan and Li, Xu and Liu, Ling and Qi, Baolei and Tian, Gao-Liang, Can Government Policies Induce Earnings Management Behavior? ‐Evidence from Chinese Public Listed Firms (Autumn 2012). Journal of International Financial Management & Accounting, Vol. 23, Issue 3, pp. 187-207, 2012. Available at SSRN: https://ssrn.com/abstract=2167151 or http://dx.doi.org/10.1111/jifm.12000

Nan Hu (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Xu Li

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Ling Liu

University of Wisconsin Eau Claire ( email )

Eau Claire, WI 54702
United States

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Gao-Liang Tian

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

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