When Does Earnings Management Matter? Evidence across the Corporate Life Cycle for Non-Financial Chinese Listed Companies

Ammar Hussain,Mirela Panait,Minhas Akbar,Ahsan Akbar,Marian Catalin Voica,Muhammad Kaleem Khan

doi:10.3390/jrfm13120313

Abstract

Information availability, firm performance, idiosyncratic volatility and bankruptcy-risk vary across the Corporate Life Cycle (CLC) stages. The purpose of this paper is to examine whether CLC stages explain firm’s propensity to engage in both accrual base and real earning management practices in the context of China. Panel data of 3250 non-financial Chinese listed firms spanning from 2009 to 2018 is used to investigate the proposed relationship. CLC stages were captured through Dickinson’s model, while earnings management is measured by employing both techniques, i.e., accruals-base earnings management and real earnings management. The data were analyzed through Panel data fixed-effects and random-effects techniques. Results reveal that, when compared to shakeout phase, managers’ response to use both earnings management practices is significantly higher during introduction and decline phases, and lower during growth and mature stages of CLC. It suggests that introductory and later-staged firms distort their factual financial information from creditors to obtain loans without strict debt covenants. Our results are robust to alternate measures and specifications. The core contribution of this research is to add a fresh perspective to the CLC research by uncovering its imperative role in influencing the earning management behavior of corporate managers.

Highlights

After recent accounting scandals caused the bankruptcy of many large organizations across the world, the efficacy of the control mechanisms and authenticity of the accounting information has been thrown into question
Based on the Hausman test, we found that in all the regression models, including three for Accrual-based Earning Management (AEM) and four for Real Earning Management (REM) practices, the p-value is less than the threshold level 0.05
The present study investigates the role of Corporate Life Cycle (CLC) stages in influencing EM practices (AEM and REM)

Summary

Introduction

After recent accounting scandals caused the bankruptcy of many large organizations across the world, the efficacy of the control mechanisms and authenticity of the accounting information has been thrown into question. Wasimullah et al (2010) and Lazzem and Jilani (2018) both reveal that self-financing ratio (SFR) shows the firms’ capacity to finance its fixed assets by utilizing its internal resources, and found it to be negatively associated with EM practices. We add SFR as a control variable in our regression models and expect a negative linkage with EM practices. We add the tangibility ratio in our regression models and expect a negative impact of tangible assets on EM practices, consistent with (An et al 2016; Pappas et al 2019). To account for this effect we included the variable of yearly stock return (YSTOCKRET) in our regression models and expect it to be positively associated with EM practices of corporate managers

Objectives

Results

Conclusion