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Review of Quantitative Finance and Accounting

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01.04.2014 | Original Research

Can media deter management from manipulating earnings? Evidence from China

verfasst von: Baolei Qi, Rong Yang, Gaoliang Tian

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 3/2014

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Abstract

This study examines the influence of media exposure on managers’ earnings management behavior using China’s publicly traded firms during 2001–2009. We find that firms with more media exposure (both negative and non-negative) manage their earnings less than firms with less media exposure. We also find that “suspect firms” (being specially treated or with refinancing plans like seasoned equity offerings or right offerings) with more media exposure engage in more accrual-based earnings management relative to other firms. These results suggest that Chinese media serve as an external monitor to the majority of firms and place excessive pressure on suspect firms. This paper contributes incrementally to the literature by emphasizing the conflicting role media exposure plays in managerial decisions in earnings management. The findings of this study have practical implications for regulators, auditors, financial analysts, as well as other information intermediaries.

Vorheriger Artikel Determinants of market beta: the impacts of firm-specific accounting figures and market conditions

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The delisting policy was issued by the CSRC in 1998, which included special treatment (ST) and particular treatment (PT) policy. If a listed firm has two (or three) successive years of loss, it is designed as a ST (or PT) firm on the stock exchanges. If a listed firm has loss for four consecutive years, its stock will be delisted from the stock exchanges. Being specially treated will bring great difficulties to the firm’s operation (Chen et al. 2008; Jiang and Wang 2008; Zhong and Janet 2010). In this study, we include ST and PT firms in one group, namely ST firms.

Chinese listed firms can choose equity refinancing either through stock rights offerings or seasonal equity offerings. The CSRC requires that listed firms’ return on equity (ROE) be >6 % in three successive years before they can issue rights offerings. The CSRC also require that listed firms’ ROE be >10 % in three successive years before they can issue seasonal equity offerings.

Several studies have argued that the press caters to the lowest common denominator. The media do not provide in-depth analyses; instead, they focus on sensationalizing issues in order to sell papers (DeAngelo et al. 1994, 1996; Core et al. 2008).

Chen and Yuan (2004), Chen et al. (2008), and Jiang and Wang (2008) find that the earnings management behavior is rampant for public traded firms in China.

The CSRC requires SEO firms have a 10 % ROE in three successive years and RO firms have an average 6% ROE in three successive years (Chen and Yuan 2004; Chen et al. 2008).

In the untabulated result, we also test the impact of media exposure on discretional accruals for suspect firms. We find that media is significantly and positively related to income-increasing accruals and negatively related to income-decreasing accruals.

We appreciate the anonymous reviewer for this helpful suggestion.

Also we rerun the 2SLS tests for the suspected group, and the results (untabulated) are consistent with the ones reported.

In their survey, Graham et al. (2005) report (page 66): “78 % of managers candidly admit that they would take real economic actions such as delaying maintenance or advertising expenditure, and would even give up positive NPV projects, to meet short-term earnings benchmarks.”

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Titel: Can media deter management from manipulating earnings? Evidence from China
verfasst von: Baolei Qi
Rong Yang
Gaoliang Tian
Publikationsdatum: 01.04.2014
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 3/2014
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-013-0353-0

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