The Consequences of Increasing the Scope of Managerial Judgement in Accounting Standards
37 Pages Posted: 9 Sep 2016
Date Written: September 2016
This paper investigates the consequences of increasing the scope of managerial judgement (ISMJ) in accounting standards via a difference‐in‐differences approach in the unique setting of China. A substantial increase in accruals‐based earnings management is found after ISMJ, in addition to a decline in real activities‐based earnings management resulting from temporarily increased sales, boosted inventory, and expense deferrals. In contrast, we find a significant increase in the relevance of accounting information. Further analysis reveals significant negative cumulative abnormal returns related to the announcement of accounting standards change over the short term. We also find a larger long‐term increase in the crash risk of the stock prices of firms that engage in more accruals‐based earnings management after ISMJ. All of these effects are more pronounced in non‐state‐owned enterprises than in state‐owned enterprises.
Keywords: Accounting standards, Cumulative abnormal returns, China, Crash risk of stock prices, Earnings management, Relevance of accounting information
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