Figure 1 Histogram of ROE for 698 Companies in Shanghai Stock ...

433 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
433
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
2
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Figure 1 Histogram of ROE for 698 Companies in Shanghai Stock ...

  1. 1. How Far Would Management Go to Manage Earnings? ---The Evidence from China Guohua Jiang Liyan Wang The Guanghua School of Management Peking University Beijing 100871 China December 2003 Very preliminary, comments welcome. The authors are assistant professor and professor, respectively, of the Guanghua School of Management, Peking University, Beijing 100871, China. We thank Wenwen Chen, Chen Li and Jingqi Lu for excellent research assistance. Please send comments to gjiang@gsm.pku.edu.cn and lywang@gsm.pku.edu.cn. 1
  2. 2. I. Introduction Earnings management has been one of the most widely studied corporate behaviors in accounting literature. Basing on this large body of research, accounting scholars have largely agreed that company management manages corporate earnings to meet certain targets. The incentives for earnings management include bonus contracts, debt covenants, initial public offerings and seasonal public offerings, etc. In terms of the means of earnings management, although accounting scholars recognize the possibility that management may manipulate real activities (company operation) to meet earnings targets, the vast majority of studies identify accrued earnings as the mean through which earnings management is achieved. One recent exception is Roychowdhury (2003). Earnings management (EM hereinafter) leads to misleading accounting information being communicated to information users. Various groups of capital market participants may suffer as a result, such as shareholders (bonus-driven EM), creditors (debt covenant-driven EM), and potential shareholders (IPO-driven EM). However, other than under its extreme form (accounting frauds or crimes), accrual- based EM does not seem to do serious harm to its victims. The reason is that the discretion on accruals is bounded by GAAP (Barton and Simko, 2002). Given the underlying economic transactions of a firm, the management’s ability to report accrued earnings is limited. Overtime, accruals will reverse as well, so management has to consider the implications of their discretion on current accruals for future earnings. This consideration in turns constraints accrual-based EM as well. 2
  3. 3. What if management can manipulate real activities (company operation) to manage earnings? That is--- will managers go such a long distance to achieve their EM targets? Will in this case myopic EM behaviors do significant harm to its “victims”? Surveying the EM studies with U.S. firms as samples, we find little research on these two questions. The reason is simple. The United States has one of the best-developed capital markets in the world. The complexity of its institutions guarantees that the market participants, including company management, do not engage in self-serving activities that is beyond a certain acceptable limit. However, what if the limit is loose? Will managers engage in more real activity- based EM in this case? Our paper answers this question with data from China’s stock market. China opened its current stocks markets at Shanghai and Shenzhen in early 1990’s. By September of 2003, there are more than 1,200 company stocks traded on the two exchanges, with a total market capitalization of 1,266 billion RMB (153 billion US dollars). In almost all aspects, China’s stock market is an emerging market. One significant difference between China’s stock market and other world markets is in the ownership structure of listed companies. When China embarked on economic reform in the late 1970’s, its main purpose was to improve the operating efficiency of state- owned enterprises (SOEs). The introduction of stock market was one step in this reform. Therefore, China’s government involvement in the development of stock market is instrumental and the government’s top priority was to list SOEs on the new 3
  4. 4. stock markets. After a SOE went public, the government usually retained a controlling interest in the listed company. Moreover, the shares retained by the government are not traded. This practice in fact divides shareholders into two groups: one group with un-traded shares who in most cases controls the listed company, and the other group with traded shares who lacks control over the company. Government regulation of the stock market is very strict. As in an emerging market, the right to get listed on stock exchanges is a scarce commodity. China’s government actually sets a very high standard and even a Quota System to list companies. For example, the Quota System limits the book value of equity of the tradable shares to a certain amount. As a result, most SOEs that would like to get listed can’t actually list their whole company. In addition, the SOE itself may not be able to meet the past profitability requirement of listing. To list at least a part of the SOE, the SOEs usually carve out the best parts of the corporation to form a new subsidiary and then apply to list the subsidiary. Therefore, most listed China’s companies are actually subsidiaries of larger SOEs. SOEs hold controlling interests in the listed companies, and government in turn controls SOEs. Central and local governments also directly own listed companies through their Bureau of Asset Management. As a result, Chinese government, through its various levels and different branches, still retain controlling interests in most listed companies. And listed companies, though nominally independent, face government interference in their internal operation. 4
  5. 5. Another feature of China’s stock market is that most management regards equity capital raised from the stock market as cost-free, and rightly so. Because parent SOEs and/or various government agencies still own the majority of the common shares, and due to the lack of protection of minority shareholder rights, company management is still only responsible to the parent SOEs and government, brushing aside the rights of minority shareholders. In fact, equity capital raised on stock market is a substitute for bank loans. In the case of bank loan, companies will have to answer to banks, but the companies do not have to answer to minority shareholders at all. Given these features of China’s stock market, there exist two strong incentives for companies to manage earnings. First, it is difficulty to get listed on the stock exchanges, and it is also easy to get delisted from the exchanges. China’s SEC sets specific requirements for companies to stay listed. Once any of these requirements are not met, companies would be put into probation, and if the companies do not satisfactorily improve their performance, they will be delisted at the end of the probation period. Section two of this paper provides a chronicle of these requirements. Delisting is a big deal on any stock markets, but it is a bigger deal for China’s listed companies. As discussed earlier, these listed companies went through a very tough process to get listed, once they got listed, they normally achieved star status in their respective local areas. Listing not only helps these companies raise capital, which is basically cost-free in contrast to other financing channels such as bank loans, it is also been regarded as a performance measure of the local government heads. Therefore, companies, once facing the 5
  6. 6. possibility of delisting from the stock exchanges, have stronger than usual incentive to find ways to meet requirements to stay listed. The SOEs behind the listed companies, and the government agencies behind SOEs, also have strong incentive to support the listed companies (Chen, Lee and Li, 2003).1 Second, most listed companies also raise additional capital from the stock market through rights offerings. China’s SEC places even stronger constraints on the privilege to do rights offering. A company must meet return-on-equity (ROE) thresholds in the years prior to a rights offering. Section two of this paper provides a chronicle of these requirements. Given that management regards equity capital raised on stock market as cost-free, it is in their interest to pursue rights offering even that means they have to manage company earnings. Plus, there is evidence that the parent SOEs encourage and help listed companies to raise more capital and then tunnel the money into the parent companies (Jian and Wong, 2003). Compared to the incentives that prompt U.S. managers to engage in earnings management (bond contracts, debt covenants, IPO and SEO, etc.), the incentives of China’s company management to avoid delisting from the stock exchanges and to raise more capital through rights offerings are much stronger. If accrual-based EM is not enough to meet respective qualification requirements, we conjecture that with the backing of SOEs and governments, China’s listed companies may engage in radical 1 On August 13, 2003, Sohu business news reports a story. Zong Heng Corporation of Jian Su province had two consecutive loss years in 2001 and 2002. The stock exchange put the company stock under Special Treatment (*ST, i.e., probation). If the company does not make profits in 2003, the stock will be delisted. Moreover, the semiannual financial report to be released is going to report losses and predict a loss of the third quarter. To avoid delisting of Zong Heng stock, it is reported that Jian Su government gets involved in restructuring of the company in the hope to turn profit in 2003. One company insider was quoted as saying: “although time is short, if the (government-backed) restructuring moves fast, it is entirely possible that we have a profit year and avoid delisting.” 6
  7. 7. form of EM such as managing real activities of the company to meet these requirements. There is no guarantee that this type of EM will benefit shareholders. It only keeps the companies listed or helps them loot more capital, but potentially could have damaged the company in the long run. It is the purpose of this paper to examine real activity-based EM in China’s listed companies. This paper adds to the EM literature in the following ways. First, we identify two EM incentives that have been less commonly studies before, managerial incentive to avoid delisting from stock exchanges and to raise more capitals. Second, we identify some real activities-based EM techniques in addition to conventional accrue-based EM techniques, namely asset sales/purchase/exchanges and equity sales/purchase. Third and most importantly, our paper shows that company management could go as far as altering real activities to meet earnings targets. The evidence of EM in accounting literature has been abundant, but how far would management go to do EM is not clear. This paper provides evidence that management would go further than accrual management to manage earnings. A few recent papers also study earnings management in China’s stock market. Jian and Wong (2003) find that listed companies manage earnings through related- party sales, and parent SOEs of listed companies tunnels resources into or away from the listed companies to extract benefits from the listed companies. Liu and Lu (2002) find that corporate governance is an important factor in deciding whether companies manage earnings. Weak corporate governance companies with a large controlling 7
  8. 8. shareholder tend to manage earnings to exceed regulatory thresholds and at times tunnel resource away from the listed companies. Chen, Lee and Li (2003) find that local government uses its tax and fiscal policies to help listed companies from its jurisdiction manage earnings to circumvent central government regulatory requirements. Our study differs from the three papers in that we look at more dramatic forms of earnings management. That is, we look at real activities that in essence change the operation of the listed companies. Our study presents a striking phenomenon of earnings management at high costs. II. A chronicle of CSRC requirements on stock listing and rights offering In this section, we provide a chronicle of CSRC requirements on stock listings and rights offering. During the short history of Chinese stock markets, regulation has to change frequently to keep pace with the fast development of the markets. In terms of delisting policy, the Chinese Company Act of 1993 mandates that if a listed company suffers three consecutive loss years, its stock will be suspended from trading on the exchanges and put into probation. If the company does not make satisfactory improvement during the probation period, its stock will be delisted. From February 2001, the probation period is one year and during the probation period, the company stock is up under Particular Transfer (PT) status. However, after January 1, 2002, CRSC removed PT status and installed Special Transfer (ST) status instead. CSRC also shortened the probation period to half-a-year. It is clear that CRSC 8
  9. 9. monitors closely those firms who do not show profitability in consecutive years and deal with them with the punishment of delising. In terms of rights offering, in 1993, CSRC requires two years of profits for companies to be eligible for rights offering. In September 1994, CSRC stops to require profits only, but require the average return on equity (ROE) of the previous three years not below 10 per cent. In January 1996, CSRC further tightens the requirements to require ROE not below 10 per cent in each of the previous three years. In March 1999, the requirements change to average ROE not below 10 per cent AND ROE not below 6 per cent in EACH of the previous three years. In March 2001, CSCR requires weighed-average ROE not below 6 per cent in the previous three years. The CSRC requirements create two critical thresholds for listed companies, one is zero profit and the other is 6 per cent or 10 per cent ROE. If possible, a company will prefer to report small profit instead of small loss to avoid getting into a delising trap, or to report a ROE above 6 per cent or 10 per cent instead of slightly fall short in case the company needs to raise more capital from stock market in the next few years. Prior studies have documented out-of-proportion number of firms reporting small profits, or reporting ROE slightly higher than 6 per cent or 10 per cent, depending on which year’s data was used. Prior literature has ably documented that once a company is going to miss all meaningful earnings thresholds (zero profit, analysts’ forecast, earnings of the same period in the previous year), management tends to “take a big bath” to earnings 9
  10. 10. (Abarbanell and Lehavy, 2001). A “big bath” to current earnings creates earnings reserve for future years. Therefore, in this paper, we identify three scenarios where earnings management is suspected: big loss firms whose ROE fall below negative 10 per cent (big loss group), small profit firms whose ROE fall between zero per cent and 2 per cent (small profit group), and rights offering firms whose ROE fall between 6 per cent and 8 per cent (rights offering group). All other firms are put into one group: other firms group. III. Identifying real activity-based earnings management techniques We identify five real activities that we suspect were used to manage earnings, equity sales, equity purchase, asset sales, asset purchases, and asset exchanges. For the sake of this paper, we call these activities earnings management activities. Equity sales refer to companies selling ownership in another firm, sometimes a subsidiary. Equity purchases refer to companies buying ownership in another firm. If these transactions are purely based on fair market prices, the room for earnings management is limited. However, as discussed earlier, a parent SOE usually controls the listed company, and the SOE tends to control a net of other companies. Furthermore, The local government behind the SOE controls more companies. This complex net of connections offer listed company opportunities to engage in equity sales and equity purchases that generate profits. Surveying the news reports on these so called “restructuring transactions”, it at first appears that the “restructuring transactions” do not make economic sense for at least one party in the transactions, 10
  11. 11. but tracing the roots of each party, quite often, will lead to the controlling shareholders of the listed company or local government. It is not rare that ownership sold (purchased) by the listed companies in one year was purchased back (sold) in another year. There are a few ways equity sales/purchases would affect earnings and ROE. For equity sales, the earnings the sold equity generates from beginning of the year to the date of sales could be recognized; for equity purchases, the earnings the purchased equity generates would be recognized. Assuming companies have a good idea about the earnings-generating ability of the equity, they would certainly pick subsidiary to sell, or other company to purchase so that their earnings target is met. Also, for equity sales, gains may be generated because selling price is higher than book value of the sold equity. A more subtle impact of equity sales/purchases is that equity sales/purchases may change the consolidation base of financial reporting. A subsidiary which was consolidated in financial reporting may not need to be consolidated after the listed company sold a certain portion of its holding in this subsidiary. After equity purchase, the listed company may need to consolidate a new subsidiary. Therefore, we believe listed companies, with the backing of parent SOE and local government, may “strategically” use equity sales/purchases to manage earnings. Similar arguments can be made for asset sales, asset purchases and asset exchanges. Therefore, in this paper, we examine whether Chinese listed companies use these five activities to manage earnings. 11
  12. 12. IV. Empirical results We hand-collect earnings management activities for 704 listed companies on the Shanghai Stock Exchange which had announced their 2002 annual results before April 30, 2003. Seven companies with negative ROE are removed from the sample. Our final sample consists of 698 companies. We first plot a histogram of ROE of these 698 companies. It is shown in figure 1. Figure 1 plot the number of firms whose ROE fall into each one-per cent interval. Firms whose ROE fall below negative 10 per cent are put into one group, so are firms whose ROE are above 20 per cent. As documented by earlier studies, it is apparent from figure 1 that there is an out- of-proportion clustering of companies in the ROE intervals (0, 1) and (6, 7). There are very few companies with ROR between negative 10 per cent and zero percent, but there are 46 companies with ROE between zero percent and one per cent—that is, these firms managed to report a small profit. There are 106 companies with ROE between 6 per cent and 7 per cent—that is, they slightly meet the CSRC rights offering requirement on ROE. In contrast, the two adjacent intervals contain much fewer companies, with 36 companies in the interval (5, 6) and 60 companies in the interval (7, 8). We believe that the out-of-proportion clustering of companies in the ROE intervals (0, 1) and (6, 7) indicates possible earnings management by these firms. Figure 2 plots number of earnings management activities by ROE intervals. Similar to figure 1, firms in the ROE interval (0, 1) report 49 cases of earnings 12
  13. 13. management activities, while firms in with ROE between negative 10 per cent and zero percent reports only a few. Firms in the ROE interval (6, 7) reports 170 such cases, while those in the ROE intervals (5, 6) and (7, 8) only report 51 cases and 78 cases, respectively. A more meaningful statistic is the average number of earnings management cases in each ROE interval. Figure 3 shows this. Apparently, in terms of average number of earnings management activities, ROE intervals (0, 1) and (6, 7) do not exhibit a higher frequency than their adjacent intervals. Table 1 gives a detailed analysis of earnings management activities. We show in this table number and average number of earnings management activities by group, and number and percentage of firms in each group reporting earnings management activities by zero time, one-to-three times and more than three times. We use other firms group as a benchmark to analyze whether big loss group, small profit group, and rights offering group report higher frequency of earnings management activities. Out of 698 firms, 58 are big loss firms, 88 are small profit firms, 168 are rights offering firms, and 384 are other firms. From the top panel of table 1, these 698 firms in year 2002 reported 951 cases of earnings management activities, 1.36 cases per firm on average. Only rights offering group reported a higher average number of earnings management activities than the benchmark other firms group (1.48 versus 1.34), while small profit group actually reported a smaller average (1.25). In terms number and percentage of firms in each group reporting earnings management 13
  14. 14. activities by zero time, one-to-three times, and more than three times, there is still no clear difference between big loss group, small profit group, rights offering group and other firms group. The other panels of table 1 report similar statistics for each individual earnings management activity. Once again, significant differences between groups are not evident. However, it appears that small profit group and rights offering group report higher average number of earnings management activities in December, the last month of a fiscal year. Small profit group reports 0.4 cases per firm, rights offering group reports 0.45 cases, while other firms only reports 0.29 cases. This is a preliminary indication that small profit firms and rights offering firms, trying to meet ROE threshold, engage in more earnings management activities right before fiscal year end. In table 2, we test whether there are significant differences in the percentage of firms reporting at least one earnings management activities. The lower panel reports the differences between big loss group, small profit group, rights offering group, and other firms group. We use a K-squared test to test whether the differences are statistically significant. Statistically significant differences are few. Small profit group reports significantly higher percentage of firms reporting asset sales (by 6 per cent), higher percentage of asset exchanges (by 7 per cent), but lower percentage of asset purchase (by 8 per cent). Big loss group reports a significantly lower percentage of firms reporting equity purchase (by 18 per cent). 14
  15. 15. Overall, table 1 and table 2 indicate that contrary to our expectation, big loss firms, small profit firms, and rights offerings firms do not report earnings management activities more often than other firms. One possibility to explain the lack of differences in table 1 and table 2 is that number of earnings management activities may not be as important as the amounts of earnings these transactions generate if firms were to use these activities to manage earnings—for example, to turn a loss year into a profit year, a small profit firms might have used only one earnings management activity which generates a larger amount of earnings than more activities of another company combined. To explore this possibility, we hand-collect the impact of earnings management activities on earnings. A better approach is to examine the impact on ROE. However, firms do not report the impact of these activities on equity, so we could not determine the impact on ROE. Firms usually report the following items in their annual reports: the contributions to current year earnings of sold assets or sold equity; the contributions to current year earnings of purchased assets or purchased equity; and the gains on asset sales or equity sales. So we separate the contributions to current year earnings into these three types. Table 3 reports the results. The numbers reported are contributions to current year earnings standardized by total equity. Other than in one case, we can see earnings management activities contribute larger amounts to earnings of big loss firms, small profit firms, rights offering firms 15
  16. 16. than to other firms. The only case where other firms group report a larger contribution from equity/asset sales than small profit group is due to one extreme observation. Getting rid of this extreme observation small profit group would report a larger contribution than other firms group by 0.027. However, using a t-test, all these differences in contributions to earnings are not statistically significant. Nevertheless, table 3 indicates that small profit firms and rights offerings firms might have used earnings management activities to increase their ROE above the zero-profit, and 6 per cent ROE thresholds. Contrary to our expectation, these earnings management activities also increase earnings for big loss group, instead of decreasing earnings to take a big bath. Our final test is a probit regression analysis to detect whether big loss firms, small profit firms, and rights offering firms report higher frequency of earnings management activities after controlling other variables that might influence the engagement of such activities. The dependent variable takes value one if a company reports more than one earnings management activities, and zero otherwise. One is the median number of earnings management activities reported by our sample firms. The independent variables include the following items. The variable Earnings Management Group takes value one if a firm belongs to big loss group, small profit group, or rights offering group, and zero otherwise. Although table 2 indicates earnings management group firms do not report significantly higher frequency of 16
  17. 17. earnings management activities, the probit regression will add a robustness check after controlling other variables that might affect the frequency of these activities. % controlling shareholder ownership is the percentage of common shares owned by controlling shareholders. If shareholder ownership is concentrated, the controlling shareholders will have more leeway to manipulate the internal operation of the firms without sufficient monitoring. We conjecture that the larger the controlling shareholder ownership, the more likely a firm may engage in earnings management activities. Liu and Lu (2002) documents that firms with weak corporate governance engages in more earnings management activities, and the existence of a controlling shareholder is frequently cited as an indication of weak corporate governance. % government ownership is the percentage of common shares owned by various levels and branches of Chinese government. As Chen, Lee and Li (2003) shows, governments are involved in helping listed companies in their own jurisdictions to meet CSRC requirements through tax benefits, we conjecture governments may also help companies engage in the earnings management activities identified in this paper through their administrative power. Market-to-Book ration is market capitalization divided by total equity. High market-to-book stocks are routinely regarded as glamour stocks and even small negative news would have significant consequences for the stock prices (Sloan and Skinner, 1999). So high market-to-book firms may tend to manage earnings to meet or exceed thresholds. Finally, we also include total assets as a control variable. Companies’ ability to use 17
  18. 18. asset sales or asset purchases depend on how much asset they control. Other than ROE, variables mentioned above are measured at beginning of year. Table 4 reports descriptive statistics of these variables. Only big loss firms show differences from the other three groups with lower controlling shareholder ownership, lower government ownership, and smaller amount of assets. Table 5 reports the probit regression results. Consistent with table 2, even after controlling for these other variables, earnings management group still show no deterministic power for earnings management activities. The sign of the coefficient is actually negative. The coefficient on % controlling shareholder ownership is 0.026 and significant, indicating firms with larger controlling shareholder ownership engage in more earnings management activities. This result is consistent with the Liu and Lu (2002) conjecture. Contrary to our expectation, the coefficient on % government ownership is –0.007 and significant. After controlling for the impact of controlling shareholder ownership, more government ownership actually decreases the likelihood of earnings management activities. Finally, the coefficients on market-to-book ratio and on total assets are not significant. In summary, the empirical analysis does not support the notion that big loss firms, small profit firms, and rights offering firms engage in more frequent earnings management activities identified by this paper, but with weak evidence, these firms report larger amounts of income-increasing contributions to current year earnings 18
  19. 19. from earnings management activities to meet or exceed important thresholds. V. Conclusions Our purpose in this paper is to test whether Chinese companies use real activities such as asset sales/purchase/exchange and equity sales/purchase to manage earnings to meet or exceed CSRC regulatory thresholds. Different from earnings management through accrued earnings, real activity-based earnings management may cause more harm to investors. Our results in this paper are weak. We do not observe significant difference in the frequency of earnings management activities between big loss firms, small profit firms, rights offering firms (firms we suspect would engage in more earnings management) and the other firms (firms we use as benchmark). However, there is indeed indication that these activities of big loss firms, small profit firms, rights offering firms generate more earnings than other firms, helping companies to meet or exceed earnings thresholds. We believe there are a few things we can do to enrich this paper. One is to expand our sample to include companies on the Shenzhen Stock Exchange. Second, since CSRC delisting and rights offering requirements are both for three consecutive years, we should further identify firms who have missed these thresholds in the past two years. These firms should have stronger incentive to manage earnings. Third, we can identify firms who in fact do rights offering in the next two years. Assuming firms decide early whether to do rights offering in the future, they would engage in earnings 19
  20. 20. management to make sure their current earnings meet CSRC requirement. We will collect more data to further explore these possibilities. 20
  21. 21. Reference Abarbanell, J., and R. Lehavy. 2001. Biased forecasts and biased earnings? The role of earnings management in explaining apparent optimism and inefficiency in analysts’ earnings forecasts. Working paper, University of California, Berkeley. Barton, J. and P. Simko. 2002. “The Balance Sheet as An Earnings Management Constraint.” Accounting Review, Forthcoming. Burgstahler, D. and I. Dichev. 1997. “Earnings Management to Avoid Earnings Decreases and Losses." Journal of Accounting and Economics, Vol. 24, No. 1 (December), pp. 99-126. Chen, X., C. Lee, and J. Li. 2003. “China’s Tango: Government Assisted Earnings Management.” Working Paper, Tsinghua University and Hong Kong University of Science and Technology. Jian, M., and T. J. Wong. 2003. “Earnings Management and Tunneling Through Related Party Transactions: Evidence from China’s Corporate Groups.” Working Paper, Hong Kong University of Science and Technology. Liu, Q., and J. Lu. 2002. “Earnings Management to Tunnel: Evidence from China’s Listed Companies.” Working Paper, The University of Hong Kong. Roychowdhury, S. 2003. “Management of Earnings Through the Manipulation of Real Activities that Affect Cash Flow From Operations”. Working Paper, University of Rochester. Skinner, D. and R. Sloan. 2002. “Earnings Surprises, Growth Expectations, and Stock Returns or Don’t Let an Earnings Torpedo Sink Your Portfolio." Review of Accounting Studies 7, 289-312. 郭宪英、张炳发:《企业盈余管理的手段方法分析》,《山东经济》2002 年第 3 期。 郭艳华、崔玲玲:《试论我国企业的盈余管理行为》 《山西财经大学学报》 , 2001 年第 4 期。 潘琰、刘秋明:《上市公司利润操纵动机比较研究》,《交通财会》2000 年第 4 期。 王啸、邵寰:《上市公司的资产重组与盈余管理行为分析》,《上海会计》2000 年第 9 期。 王跃堂:《我国证券市场资产重组绩效之比较分析》,《财经研究》1999 年第 7 期。 邹小凡、陈雪洁:《我国上市公司盈余管理研究的实证发现》 《浙江学刊》 , 2001 年第 6 期。 21
  22. 22. Figure 1 Histogram of ROE for 698 Companies in Shanghai Stock Exchange, 2002 Histogram of ROE for 698 Companies in Shanghai Stock Exchange, 2002 120 100 Frequency 80 60 40 20 0 <=-10 -4 -2 0 2 4 6 8 18 20 -8 -6 10 12 14 16 ROE Figure 2 Histogram of Earnings Management Activities of 698 Companies in Shanghai Stock Exchange, 2002, by ROE Groups Histogram of Earnings Management Activities of 698 Companies in Shanghai Stock Exchange, 2002, by ROE Groups 200 150 Frequency 100 50 0 -2 18 20 <-10 -8 -6 -4 0 2 4 6 8 10 12 14 16 ROE 22
  23. 23. Figure 3 Histogram of Average Number of Earnings Management Activities of 698 Companies in Shanghai Stock Exchange, 2002, by ROE Groups Histogram of Average Number of Earnings Management Activities of 698 Companies in Shanghai Stock Exchange, 2002, by ROE Groups 6.00 Average Frequency 5.00 4.00 3.00 2.00 1.00 0.00 10 <-10 -8 -6 -4 -2 0 2 4 6 8 12 14 16 18 20 ROE 23
  24. 24. Table 1 Summary of Earnings Management Activities   Big Loss Firms Small Profit FirmsRights Offering Other Firms All Firms Firms # of firms 58 88 168 384 698 # of All Activities 78 110 249 514 951 Average per firm 1.34 1.25 1.48 1.34 1.36 Number and Percentage of Firms Reporting Earnings Management Activities by Zero times 27 47% 36 41% 75 45% 163 42% 301 43% One to three times 24 41% 46 52% 69 41% 180 47% 319 46% More than three times 7 12% 6 7% 24 14% 41 11% 78 11% # of Equity Sales 45 39 81 154 319 Average per firm 0.78 0.44 0.48 0.4 0.46 Zero times 45 78% 66 75% 135 80% 299 78% 545 78% One to three times 9 16% 20 23% 25 15% 77 20% 131 19% More than three times 4 7% 2 2% 8 5% 8 2% 22 3% # of Equity Purchase 8 27 90 174 299 Average per firm 0.14 0.31 0.54 0.45 0.43 Zero times 53 91% 70 80% 116 69% 283 74% 522 75% One to three times 4 7% 18 20% 49 29% 95 25% 166 24% More than three times 1 2% 0 0% 3 2% 6 2% 10 1% # of Asset Sales 12 19 16 56 103 Average per firm 0.21 0.22 0.1 0.15 0.15 Zero times 49 84% 73 83% 152 90% 345 90% 619 89% One to three times 9 16% 15 17% 16 10% 37 10% 77 11% More than three times 0 0% 0 0% 0 0% 2 1% 2 0% # of Asset Purchase 7 13 46 100 166 Average per firm 0.12 0.15 0.27 0.26 0.24 Zero times 51 88% 78 89% 134 80% 309 80% 572 82% One to three times 7 12% 10 11% 33 20% 74 19% 124 18% More than three times 0 0% 0 0% 1 1% 1 0% 2 0% # of Asset Exchange 6 12 16 30 64 Average per firm 0.1 0.14 0.1 0.08 0.09 Zero times 53 91% 76 86% 157 93% 356 93% 642 92% One to three times 5 9% 12 14% 10 6% 28 7% 55 8% More than three times 0 0% 0 0% 1 1% 0 0% 1 0% # of December 16 35 76 111 238 Activities Average per firm 0.28 0.4 0.45 0.29 0.34 Zero times 49 84% 67 76% 127 76% 307 80% 550 79% One to three times 8 14% 20 23% 38 23% 76 20% 142 20% More than three times 1 2% 1 1% 3 2% 1 0% 6 1% # of Activities With 20 27 85 132 264 Subsidiaries Average per firm 0.34 0.31 0.51 0.34 0.38 Zero times 48 83% 73 83% 121 72% 296 77% 538 77% One to three times 9 16% 14 16% 44 26% 83 22% 150 21% More than three times 1 2% 1 1% 3 2% 5 1% 10 1% This table summarizes earnings management activities by groups. It presents average number of each activity by groups, and number and percentage of firms reporting zero time, one-to-three times, and 24
  25. 25. more-than-three times such activities. For 698 2002 Shanghai Stock Exchange companies who reported a valid ROE, those with ROE less than –10% are classified into Big Loss Group, those with ROE between 0% and 2% into Small Profit Group, and those with ROE between 6% and 8% into Rights Offering Group. All others are classified into Other Firms Group. Equity sales and equity purchases refer to companies selling or buying ownership of other companies; asset sales, asset purchase, and asset exchange refer to selling, buying, and exchanging of fixed assets; December activities refers to any equity activities that occur in December of calendar year (all Chinese companies have December as fiscal year end); activities with subsidiary refer to dealings with a subsidiary. 25
  26. 26. Table 2 Differences in Reporting Earnings Management Activities among ROE Groups ---Number of Firms Reporting At Least One Earnings Management Activity Earnings Management Activities Equity Sales Equity Asset Sales December With Subsidiary Purchase Activities Asset Purchase Asset Exchange Any Activities Freq. % Freq. % Freq. % Freq. % Freq. % Freq. % Freq. % Freq. % Big Loss 13 9% 9 Firms (1) 23% 5 16% 7 12% 5 9% 31 53% 9 16% 10 18% Small Profit Firms 22 20% 15 (2) 12 25% 18 17% 10 11% 14% 52 59% 21 24% 15 17% Rights Offering 33 31% 16 Firms (3) 20% 52 10% 34 21% 11 7% 93 55% 41 25% 47 28% Other Firms (4) 85 27% 39 22% 101 11% 75 19% 28 7% 221 58% 77 20% 88 23% Difference in Frequency of Earnings Management Activities Between Groups (1) – (4) 1% -18% 5% -7% 2% -5% -4% -5% (2) – (4) 2% -7% 6% -8% 7% 1% 4% -6% (3) – (4) -2% 4% -1% 2% 0% -3% 5% 5% This table presents differences in frequency of occurrence of earnings management activities. For all 2002 Shanghai Stock Exchange companies who reported a valid ROE, those with ROE less than –10% are classified into Big Loss Group, those with ROE between 0% and 2% into Small Profit Group, and those with ROE between 6% and 8% into Rights Offering Group. All others are classified into Other Firms Group. This table for each group reports the number of firms and percentage of firms in respective group reporting at least one activity of equity sales, equity purchase, asset sales, asset purchase, and asset exchanges. We use K-squared test to test the difference of the percentages between groups. Statistically significant differences are highlighted in bold. 26
  27. 27. Table 3 The Impact of Earnings Management Activities on Earnings by Group Impact on Earnings of Earnings Management Activities Equity and Gains on Total Asset Equity or Equity and Purchase Asset Sales Asset Sales Big Loss Firms (1) 0.030 0.006 0.020 0.029 Small Profit Firms (2) -0.004* 0.015 0.028 0.024 Rights Offering Firms (3) 0.050 0.004 0.020 0.027 Other Firms (4) 0.002 -0.013 0.014 -0.001 (1) – (4) 0.028 0.019 0.005 0.029 (2) – (4) -0.007 0.027 0.014 0.024 (3) – (4) 0.047 0.017 0.006 0.028 *The magnitude of this number is mainly due to one extreme observation. After getting rid of this extreme observation, it is 0.0029. This table presents the impact of earnings management activities on earnings by groups. For all 2002 Shanghai Stock Exchange companies who reported a valid ROE, those with ROE less than –10% are classified into Big Loss Group, those with ROE between 0% and 2% into Small Profit Group, and those with ROE between 6% and 8% into Rights Offering Group. All others are classified into Other Firms Group. The second column reports contributions to earnings from beginning of the year to the date equity or asset is sold. The third column reports the contributions to earnings from the date of equity purchase or asset purchase to fiscal year end. The fourth column reports gains on equity or asset sales. The last column reports the combined effects. 27
  28. 28. Table 4 Descriptive Statistics Big Loss Small Rights All Firms Firms Profit Offering Firms Firms Other Firms Number of observations 58 88 168 698 384 ROE -110.16 1.03 6.83 -2.82 (-36.01) (0.98) (6.67) 8.27 (6.3) (8.29) % Controlling Ownership 36.50 45.38 44.48 44.99 (33.02) (45.74) (44.19) 46.56 (44.90) (46.43) % Government Ownership 21.81 29.91 30.03 30.32 (19.09) (31.33) (31.58) 32.00 (30.49) (33.99) Market-to-Book Ratio 6.60 4.89 4.80 6.95 (5.16) (4.47) (4.04) 8.44 (4.29) (4.23) Total Assets (millions) 1242.47 2235.76 2168.09 2717.79 (933.52) (1247.90) (1307.65) 3324.68 (1217.09) (1281.29) This table presents summary statistics of our sample. For 698 2002 Shanghai Stock Exchange companies who reported a valid ROE, those with ROE less than –10% are classified into Big Loss Group, those with ROE between 0% and 2% into Small Profit Group, and those with ROE between 6% and 8% into Rights Offering Group. All others are classified into Other Firms Group. ROE is return on equity; % controlling ownership is the percentage of common shares owned by controlling shareholders; % government ownership is the percentage of common shares owned by various levels and branches of Chinese government; Market-to-Book ration is market capitalization divided by total equity. Other than ROE, variables are measured at beginning of year. 28
  29. 29. Table 5 Probit Regression of Companies Reporting Earnings Management Activities on Determinant Variables Predicted Parameter P-value Sign Estimate Chi-SQ Intercept -0.190 0.58 0.44 Earnings Management Group + -0.049 0.08 0.78 % Controlling Ownership + 0.026 18.68 <0.01 % Government Ownership + -0.007 3.82 0.05 Market-to-Book Ratio + 0.002 0.32 0.57 Total Assets + -0.000 0.75 0.39 Log Likelihood Ratio: -384.41 Number of Observation: 617 This table reports Probit regression results. The dependent variable takes value one if a company reports more than one earnings management activities, and zero otherwise. For 617 2002 Shanghai Stock Exchange companies who reported a valid ROE, those with ROE less than –10% are classified into Big Loss Group, those with ROE between 0% and 2% into Small Profit Group, and those with ROE between 6% and 8% into Rights Offering Group. All others are classified into Other Firms Group. Earnings Management Group includes big loss group, small profit group and rights offering group. ROE is return on equity; % controlling ownership is the percentage of common shares owned by controlling shareholders; % government ownership is the percentage of common shares owned by various levels and branches of Chinese government; Market-to-Book ration is market capitalization divided by total equity. Other than ROE, variables are measured at beginning of year. 29

×