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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Accounting and Public Policy, Volume 32, Issue 4, July–August 2013, Pages 292–313
This study examines the effect of disclosure regulation on earnings management using Taiwanese companies conducting transactions with China as the institutional setting. Measuring earnings management by the amount of discretionary accruals (DACCs), the study shows that disclosure regulation mitigates DACCs of Taiwanese firms engaging in related-party transactions with Chinese entities. Following enactment of the disclosure regulation in November 2000, DACCs among Taiwanese enterprises conducting transactions via offshore affiliates dropped. While the disclosure regulation helps to reduce earnings management, this study reports that such effect is asymmetric between high-tech firms and non–high-tech firms. Specifically, the disclosure regulation is effective in reducing earnings management among firms in non–high-tech sectors. However, such effect is not significant among firms in high-tech sectors. This study discusses the implications of empirical findings for corporate management, regulatory agencies, and firm stakeholders.
Political concerns and economic anxiety can give rise to new regulations. Adopting the political cost hypothesis, Watts and Zimmerman (1986) suggest that firms may manage earnings when targeted by regulatory actions. Following this argument, the literature indicates that management may arrange transactions through related parties to conceal business activities from government agencies to mitigate the adverse effect of regulations on firm operations (Jian and Wong, 2010 and Kohlbeck and Mayhew, 2010). Because of the low transparency and the sophisticated nature of related-party transactions (RPTs), firms have opportunities to manipulate reported earnings. Since RPTs may not have occurred or may have occurred on different terms with arm’s length parties, the primary course of action that government can take toward enterprises is to regulate RPTs. As Shaffer (1995) indicates, regulatory interventions in business activity are relatively prevalent because governments around the globe have long abandoned laissez-faire economic policy (Shaffer, 1995). Using Taiwanese firms operating in China as the institutional setting, this study contributes to the accounting literature by examining the effect of disclosure regulation on earnings management. This setting is selected because the Taiwan government has enacted laws and regulations to slow down Taiwanese enterprise investments and operations in China.3 The purpose of these actions is to mitigate the economic and political anxiety among the public in Taiwan, since people have become increasingly concerned over their economic dependency on China and the potential effect of such dependency on Taiwan’s political autonomy. Because government controls over business activity could have adverse effects on firm performance, many Taiwanese firms have established offshore affiliates, as related parties, and conduct transactions with their Chinese counterparts through these affiliates to moderate the economic consequences of government regulations. As in other forms of RPTs,4 conducting transactions through offshore affiliates provides opportunities for corporate executives to manage earnings. Hence, the quality of financial statements declines (Healy and Wahlen, 1999 and Gordon et al., 2005). To strengthen regulation over Taiwanese enterprises’ business activities in China, Taiwan’s government enacted a disclosure regulation in November 2000 that requires Taiwanese firms to report their investments and transactions with Chinese entities through related parties. To investigate the effectiveness of the disclosure regulation, this study examines whether earnings management among firms engaged in RPTs through their offshore affiliates with Chinese entities has decreased since promulgation of the regulation. Further, this study explores whether disclosure regulation would be more effective in mitigating earnings management among firms in non-high-tech industries than those in high-tech industries. Using the amount of discretionary accruals (DACCs) as a proxy for earnings management, this study finds that the disclosure regulation effectively reduces the DACCs of Taiwanese firms engaging in RPTs with Chinese entities. While the promulgated disclosure regulation helps to reduce overall earnings management among studied firms, it is more effective in reducing the amount of DACCs of firms in non-high-tech industries than in high-tech industries. This study proceeds as follows. Section 2 describes the political background between Taiwan and China and discusses the uncertainties encountered by Taiwanese firms investing and operating in China. This section also highlights the key aspects of the disclosure regulation and connects it to earnings management. Section 3 reviews the literature in earnings management and outlines the relations between government regulations, RPTs, and earnings management. Section 4 develops the research hypotheses. Section 5 describes sample selection procedures and presents the regression models. Section 6 reports the empirical results. Section 7 describes robustness tests and presents the results of these examinations. Finally, Section 8 summarizes the empirical findings and discusses the implications of this study for corporate management, regulatory agencies, and firm stakeholders.
نتیجه گیری انگلیسی
The underlying nature of RPTs is complex because such transactions may not have occurred or may have occurred on different terms with arm’s length entities. To make RPTs transparent, the regulatory agencies can require involved firms to make disclosures. Using Taiwanese firms operating in China as the institutional setting, this study contributes to the accounting literature by examining the following questions empirically: (1) does earnings management among firms engaged in RPTs through offshore affiliates with Chinese entities decrease after promulgation of the disclosure regulation? (2) Would disclosure regulation be more effective in mitigating earnings management among firms in non-high-tech sectors than among those in high-tech sectors? Measuring earnings management using the amount of estimated DACCs, this study reports that the disclosure regulation effectively mitigates the degree of earnings management among Taiwanese firms engaging in RPTs with Chinese entities. As predicted, the disclosure regulation is also effective in limiting earnings management among firms in non-high-tech sectors. However, this effect is not significant among firms in high-tech sectors. The research findings reported in this study have several implications. For corporate management, the results indicate that management probably carries out RPTs to circumvent regulatory controls. Given the sophisticated nature and the low transparency of RPTs, corporate insiders may mislead their stakeholders about firms’ underlying economic performance. As a consequence of earnings management, investor confidence in firm performance may diminish and the credibility of the firm’s financial statements may go down. Hence, corporate executives’ ability to raise additional capital in the future could be jeopardized. For regulatory agencies, the results of this study indicate that the quality and transparency of financial statements may not improve when the regulatory agency simply enforces rules and regulations without considering the possible counteractions taken by firm management to mitigate the economic consequences of regulatory mandates. In particular, the effect of regulation may not be symmetric among industries. To ensure the effectiveness of regulatory controls and to protect the quality of financial statements, policymakers and government agencies should examine how proposed regulations affect firms’ current operations, corporate competitive advantages, and industry developments before enacting them. Failing to consider these factors can jeopardize the effectiveness of regulations and reduce the quality of financial reports. For firm stakeholders, the results of this study show that earnings management exists when a firm arranges transactions through related parties. Because RPTs may not fully reveal the underlying nature of economic events and because such transactions may not be in the best interests of stakeholders, they may suffer financial losses by investing in firms engaging in RPTs. Hence, it would be beneficial for stakeholders to seek other avenues to constrain management’s opportunistic behavior so that their financial interests can be protected. The results of this study should be interpreted with caution because of the following reasons. First, this study is limited to Taiwanese firms conducting transactions through their offshore affiliates. Therefore, we may not be able to generalize the empirical results to other forms of RPTs. Second, there are possible unspecified and uncontrolled factors in the analyses. For instance, differences in reporting rules and conventions between countries/regions may affect earnings management. To address these limitations, researchers are encouraged to explore theories from other disciplines, incorporate additional variables, expand this study’s scope, and conduct further research to advance our understanding of the relation between government regulations, RPTs, and earnings management.