Earnings Management Motivation and Cost Stickiness—Research Based on Private Equity Placement

Yihuan Li

doi:10.4236/ajibm.2018.83039

Abstract

Cost Stickiness means that costs increase more rapidly with an activity increase than they decrease with an activity decrease. This paper focuses on Chinese A-shares listed companies, which implement private equity placement from 2007 to 2016, to study the impact of earnings management motivation of private equity placement on listed companies’ cost stickiness. The results show that the listed companies implementing private equity placement have positive motivation of earnings management, and will cut more costs when the operating income declines, thus weakening their cost stickiness. Further tests find that this weakened effect is more obvious in the state-owned enterprises, and less obvious in the enterprises audited by the big-four.

Highlights

Cost management is an important theme of business management
It can see that the estimated values of β3 are 0.253 and 0.03 respectively. The former is significant at the level of 1% and the latter is not significant, supporting the hypothesis 3, which shows that compared with non-state-owned enterprises, state-owned enterprises have strong political connections and are subject to fewer earnings management constraints in the approval of private equity placement, increasing the decline of cost when operating income declines and weakening the cost stickiness
The coefficient of PEP*DEC*lnRev is not significant in the big-four, while the coefficient of PEP*DEC*lnRev is 0.112 and is significantly positive at the level of 1% in the non-big-four, supporting the hypothesis 4, which indicates that when listed companies implement private equity placement, the big-four auditors play a positive role for restraining earnings management, thereby inhibiting the weakening of cost stickiness

Summary

Introduction

Cost management is an important theme of business management. Costs change symmetrically and proportionally with changes in activity levels, but later scholars questioned it. ABJ (2003) [1] found that when operating income rose by 1%, the sales and management expenses of the American public companies (SG & A) increased by 0.55%. When operating income decreased by 1%, SG & A decreased by only 0.35%. The cost increase caused by the increase of operating income was greater than the cost reduction caused by the decrease of operating income. The study of cost stickiness helps to reveal the “black box” of cost management

Methods

Results

Conclusion