Premium
Earnings Management and the Accrual Anomaly: Evidence from China
Author(s) -
Li Yuanpeng,
Niu Jianjun,
Zhang Ran,
Largay James A.
Publication year - 2011
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/j.1467-646x.2011.01050.x
Subject(s) - accrual , earnings management , earnings , china , business , stock market , anomaly (physics) , decile , distortion (music) , stock (firearms) , monetary economics , accounting , economics , financial economics , geography , physics , archaeology , condensed matter physics , amplifier , context (archaeology) , statistics , mathematics , cmos , electronic engineering , engineering
Using the unique C hinese setting in which the “delisting regulation” is based on accounting numbers, we separate earnings management into (1) earnings management responding to regulation and (2) earnings management prompted by market pressures and further document that earnings management responding to market pressures produces the accrual anomaly (Sloan, 1996) and earnings management responding to regulation does not. Initially unable to detect the accrual anomaly in C hina's stock market, we were reluctant to conclude that C hina's market is more efficient than that in the U nited S tates. After observing a disproportionate number of “big‐bath” loss firm‐years in the lowest decile of accruals for our sample, we estimated the apparent earnings distortion induced by the delisting regulation. When we excluded this distortion from our analysis, we documented the presence of the accrual anomaly in C hina's stock market. We conclude that the delisting regulation creates an artificial distribution of firm earnings in C hina that affects the market pricing of accruals and masks the accrual anomaly. The results have implications for policy makers and regulators in general, and those in emerging markets in particular.