The Consequences of Increasing the Scope of Managerial Judgement in Accounting Standards

37 Pages Posted: 9 Sep 2016

See all articles by Wei Zhou

Wei Zhou

Southwestern University of Finance and Economics (SWUFE)

Liansheng Wu

Peking University - Guanghua School of Management

Hong Wang

Zhejiang Gongshang University (ZJGSU)

Date Written: September 2016

Abstract

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

Suggested Citation

Zhou, Wei and Wu, Liansheng and Wang, Hong, The Consequences of Increasing the Scope of Managerial Judgement in Accounting Standards (September 2016). Abacus, Vol. 52, Issue 3, pp. 404-440, 2016. Available at SSRN: https://ssrn.com/abstract=2836729 or http://dx.doi.org/10.1111/abac.12085

Wei Zhou (Contact Author)

Southwestern University of Finance and Economics (SWUFE)

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Liansheng Wu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Hong Wang

Zhejiang Gongshang University (ZJGSU) ( email )

Zhejiang
China

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