The Effect of Regulatory Benchmarks on Firm Reporting Behavior

39 Pages Posted: 29 Sep 2013 Last revised: 7 Sep 2016

See all articles by Yun Fan

Yun Fan

University of Oklahoma - Steed School of Accounting

Wayne B. Thomas

University of Oklahoma

Chong Wang

University of Kentucky

Date Written: February 16, 2015

Abstract

Accounting researchers question the effect of (“bright-line”) regulations on firms’ financial reporting behavior. To offer evidence on this issue, we take advantage of the regulatory environment in the Chinese setting. In China, regulators have created a bright line at which firms must disclose within 30 days after the fiscal year end expected changes in net income of 50% or greater. Consistent with earnings management to avoid reporting earnings that miss this explicit regulation-generated benchmark, we find far more firms than would be expected just beat the -50% threshold (i.e., there is a distinct “kink” in the earnings change distribution at -50%). As further evidence of earnings management, firms just beating the −50% threshold have higher abnormal accruals and excess non-operating income. The ability of firms to avoid missing the -50% regulatory benchmark, however, is reduced for those with stronger monitoring (foreign investors, exchange regulators, and IFRS). We find no evidence of earnings management at the regulatory threshold of 50% change in net income. Overall, our study sheds light on firms’ opportunistic reporting behavior to suppress bad news related to a regulatory benchmark and on the monitoring mechanisms associated with such behavior.

Keywords: Regulatory benchmark, disclosure regulation, earnings management, monitoring

Suggested Citation

Fan, Yun and Thomas, Wayne B. and Wang, Chong, The Effect of Regulatory Benchmarks on Firm Reporting Behavior (February 16, 2015). Journal of International Accounting Research 14 (1): 85-107, 2016, Available at SSRN: https://ssrn.com/abstract=2332343 or http://dx.doi.org/10.2139/ssrn.2332343

Yun Fan (Contact Author)

University of Oklahoma - Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

Chong Wang

University of Kentucky ( email )

Lexington, KY 40506
United States

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