The impact of regulations on earnings management through classification shifting: Evidence from China

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Abstract

This study examines the impact of regulations on earnings management through classification shifting during 1995 to 2014 in China. Prior literature finds that Chinese firms use non-recurring items to meet or beat the probability hurdles measured by the return on equity (ROE) before 2001. To curb excessive net gains, regulators mandates a core ROE excluding net gains from non-recurring items in 2001. The lower of bottom-line and core ROE will be used as the test base for approving new equity offerings. We find no evidence for classification shifting before 2001 when listed firms were free to manipulate non-recurring items. However, there is evidence that firms misclassify gains upwards into sales revenues (gain shifting) after 2001, when the core ROE regulation becomes effective. We find that firms engage in gain shifting to a greater extent in the period before new equity offerings during 2001 to 2006, and to beat the analyst forecast during 2007 to 2014.
Original languageEnglish
Number of pages42
Publication statusPublished - 2019
EventJournal of Contemporary Accounting and Economics (JCAE) Annual Symposium - Multimedia Unversity, Putrajaya, Malaysia
Duration: 7 Jan 20199 Jan 2019
https://jcae2019.wordpress.com/

Conference

ConferenceJournal of Contemporary Accounting and Economics (JCAE) Annual Symposium
Abbreviated titleJCAE 2019
CountryMalaysia
CityPutrajaya
Period7/01/199/01/19
OtherThe Journal of Contemporary Accounting and Economics (JCAE) proudly announces that the 2019 JCAE Doctoral Consortium and Annual Symposium, co-organized by Multimedia University, Deakin University, Hong Kong Polytechnic University and University of Technology Sydney will be held in Putrajaya, Malaysia from January 7th – 9th, 2019. The Doctoral Consortium provides an opportunity for students to present their proposals and interact with renowned professors of international standing. The Symposium, on the other hand, provides a platform for accounting, economics and corporate governance academics to present cutting-edge research findings and to exchange insightful perspectives. The Special Sessions for Malaysian Studies provide opportunities for international researchers to disseminate interesting topics and discussions on current accounting research in Malaysia. PROGRAMME The two-day symposium comprises Plenary Paper Sessions, Concurrent Paper Sessions, Special Session for Malaysian Studies, Research Forums and a Corporate Social Responsibility & Governance Forum; preceded by a one-day Doctoral Consortium.
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    Hu, J., & Duncan, K. (2019). The impact of regulations on earnings management through classification shifting: Evidence from China. Journal of Contemporary Accounting and Economics (JCAE) Annual Symposium, Putrajaya, Malaysia.