به اشتراک گذاری اصلاحات و مدیریت سود : مدارک و شواهد از چین

This paper investigates the impact of split-share structure reform on earnings management in China. A unique institutional feature of China was the co-existence of two types of share that endowed all shareholders with equal voting and cash flow rights but different tradability. This split-share structure significantly constrained the tradability of shares that led the Chinese Securities Regulatory Commission to make it mandatory for the conversion of non-tradable shares into tradable shares from 2006 onwards. We investigate whether such a conversion has any effect on information quality through reduced earnings manipulation. We specifically examine the incentives for earnings management during the reform-transition period. A unique feature of the split-share reform has been the requirement for non-tradable share holders to compensate the tradable share holders. We argue that the rational response from the non-tradable share holders would be to pay a lower consideration to tradable share holders by portraying a favorable picture through income-increasing earnings management. We also test for the effect of an increase in tradable shares on earnings management during the reform-transition and post-reform period.

This paper investigates the effect of split-share structure reform in China on the incentives for earnings management practices by Chinese corporate managers. A distinct feature that separated the Chinese stock market from those of other countries was the creation of a two-tier share structure consisting of non-tradable shares (NTS) and tradable shares (TS).12 The NTS held by state and legal persons effectively gave the government absolute control over the joint stock companies. Such a split-share structure arrangement has been argued to have created severe agency problems between the controlling (NTS holders) and minority shareholders because of the weak managerial incentives faced by NTS controlled firms to act in the best interest of the public shareholders (Wei & Geng, 2008). Considering this split-share structure as an obstacle to the efficient functioning of the Chinese capital market, the Chinese government initiated a split-share structure reform to convert publicly listed firms’ NTS to TS. The reform allows the NTS holders to sell and realize gains from stock price appreciation same as TS albeit through a gradual process. Event study analysis focusing on the market reaction of the reform announcement generally concludes that share reform has been successful evidenced by positive excess stock returns and increased trading volumes and liquidity (e.g., Liao et al., 2010 and Lu et al., 2011). We depart from the financial economists’ approach and focus on the quality of accounting information — proxied by the magnitude of earnings management to determine the effect of the split-share reform. Research on earnings management in China is relatively sparse and primarily examines the managerial propensity to manage earnings to meet regulatory thresholds for equity issuance. For example, Chen and Yuan (2004) use data from 1996 to 1998 and report strong evidence that Chinese managers managed earnings to exceed the minimum 10% return-on-equity (ROE) requirement for right issues. We contribute to the earnings management research in China and financial reporting regulation in general, by considering a significant regulatory change with profound implications for the Chinese stock market using a much longer sample period from 2001 to 2009, longer than any other studies on earnings management in China. We have broken down our sample period from 2001 to 2009 into three distinct time periods namely, the pre-reform period (2001–04), the reform-transition period (2005–07), and the post-reform period (2008–09) to examine the differential extent of earnings management by Chinese managers during these three regulatory phases. We begin our analysis by investigating the association between NTS holdings and earnings management in the pre-reform period. Firth, Fung, and Rui (2007, p.465) argue that “…the controlling shareholders own non-tradable shares and so the market price of the tradable shares is of less interest to them; this may make them less concerned about the quality of public accounting information.” The incentives for earnings management for these NTS firms may stem from the “expropriation” argument. Earnings management allows these NTS holders to transfer resources to other wholly-owned businesses. However, instead of examining the effect of NTS holdings on earnings quality, they test for the effect of TS holders on earnings management. They find a negative and marginally significant association between absolute discretionary accruals (DACCR), a proxy for earnings management, and INDIV (a proxy for tradable share holders) using data from 1997 to 2003. Additionally, their results may be biased because of the inclusion of B-shares along with A-shares as components of TS. The financial statements of B-share companies are prepared following International Accounting Standards (IASs) and are all audited by Big 5 auditors in order to improve the credibility of financial statements. Firth et al. (2007) do not specify whether their sample also includes B-shares. We, therefore examine the effect of NTS holdings on earnings management to provide a cleaner test since NTSs pertain to only A segment shares. We then examine the incentives for earnings management during the reform-transition period. A unique feature of the split-share reform has been the requirement for NTS holders to compensate the TS holders. Under the split-share structure, tradable A-shares are priced with the expectation that non-tradable A-shares can't be traded in the open market. Hence, the former trades at a premium which represents the value of liquidity. After the reform, when non-tradable A-shares become tradable, there is an expectation that the pricing will improve this type of shares at the expense of shareholders of tradable A-shares. To avoid the inequitable transfer of wealth, shareholders of tradable A-shares must be compensated (Lu et al., 2011). We argue that the rational response from the NTS holders would be to pay a lower consideration to TS holders and the former group could engage in upward earnings management to achieve that goal. Such manipulated earnings will portray a profitable picture of the organization to the TS holders. If TS holders can't undo such strategic earnings management practices, then they may be content to accept a lower consideration value with the expectation that firm performance will continue to improve in the future. Increased firm performance, in turn, will boost the stock price to their benefit. Our empirical evidence, however, does not lend credence to such a proposition. We also tested for the effect of an increase in TS on earnings management during the reform-transition and post-reform period and find that there is no significant (negative) association between TS and DACCR during the reform-transition (post-reform) period respectively. We use DACCR, an extensively used earnings management proxy, to test our hypotheses. Previous earnings management studies in China documented that dominant shareholders expropriate resources from minority shareholders by accrual management techniques (Aharony et al., 2010 and Aharony et al., 2000); and Chinese listed companies used such techniques to meet or beat earnings thresholds promulgated by the China Securities Regulatory Commission (hereafter CSRC) for regulations related to Initial Public Offering (IPO), right issues and delisting (Yu et al., 2006 and Kao et al., 2009). We find that NTS holding is positively associated with DACCR implying the presence of earnings manipulation in the pre-reform period. Our paper contributes to the evolving literature on earnings management in China by providing direct evidence regarding the efficacy of the reform in improving the quality of accounting information in the backdrop of Chinese regulatory change and identifying a unique incentive (compensation consideration) for income-increasing earnings management.

The effect of regulation on the properties of accounting information has received significant research attention in different countries. The rationale for such studies hinges on the fact that compliance with regulation is costly and, therefore, this cost must be measured against the benefits derived in order to justify regulation. The bulk of the regulation and accounting information literature comes from the USA. However, more interesting insights are likely to be derived from studies of this kind in countries where enforcement mechanisms are rather weak. China is one such example (Wang et al., 2008). This study takes advantage of the recent share market reform in China that is aimed at making its stock markets more vibrant and attractive to outside investors. We investigate earnings management practices in China during pre-reform, reform-transition, and post-reform periods. We document that the earnings management practices were constrained in the post-reform period where all NTS became TS holders. An interesting finding emerging from his research is the incentives for managers to engage in income-increasing DACCR practices to reduce the level of consideration from NTS holders to TS holders mandated by the regulation. Our empirical evidence, however, fails to provide support for this hypothesis. This study suffers from a number of limitations. First, the result of any earnings management study depends to a certain extent on the reliability of the DACCR model as a proxy for earnings management. There is no best accruals model in the extant accounting literature. However, the performance-matched DACCR model has gained popularity because of the model's desirable property to control for extreme performances. Second, this paper did not directly address the possibility of other governance mechanisms playing an important role in constraining earnings management in the post-reform period. One such mechanism could be audit quality. The audit market in China is different from that of developed countries that competition among auditors is more pronounced in China due to active participation of small- and mid-sized CPA firms and low concentration of Big 4 auditors (Wang & Iqbal, 2009). We find that Big 4 audit concentration has remained relatively stable during the 2002–2009 sample period which rejects the conjecture that an improvement in audit marker (a substantial increase of audit market share by Big 4 audit firms) rather than the split reform per se, is associated with reduced earnings management. We do, however, acknowledge that concurrent improvement in other governance mechanisms like audit committees may negatively affect managerial DACCR practices.