Midterm Exam The purpose of this examination is t

Midterm Exam
The purpose of this examination is to practice using SPSS to
analyze the data. You should attempt each of the questions
detailed on the following pages. You will need to have read
through the provided materials in the class
first to familiarize yourself with its contents and revise
the various statistical procedures covered.
There are a number of parts to this exercise.
· In Part A, you are asked to create your own data file and to
perform analyses on this data file.
· In Part B, you will be asked to interpret some output generated
by SPSS.
· In Part C, you will be using the data file attached in mid-term
dropbox. Full details of this data file is also included in the
dropbox, and you should read through this section thoroughly
before beginning. This is a real data file that is condensed from
data collected by Postgraduate Diploma of Psychology students.
· In Part D, you will estimate sample size by using G*power.
The following rules apply for this assignment:
· If applicable, answer the question under three headings.
1. SPSS syntax
2. Necessary SPSS output
3. Interpretation and/or conclusion of your analysis
· Organize your work in a reasonably neat and coherent way.
Work scattered all over the page without a clear ordering will
receive very little credit.
· Only necessary output from the SPSS software should be in
the submitted exam.
· You are required to work INDIVIDUALLY.

· Justification does not include hundreds of pages of computer
output with hopes you covered all aspects. Justification is a
well thought out and well-articulated rationale for what you do!
Do not JUST SUBMIT SPSS OUTPUTS or CODES
Part A
Sample questionnaire
1. Sex
___ Male ___ Female
2. Age in years __________
3. Education level (please indicate the highest level of
schooling that you completed)
_____ Year 10 _____ Year 12 ______ University or
College
4. Are you currently on a diet to lose weight?
____ Yes ____ No
Mastery Scale
Please indicate how much you either agree or disagree with each
of the following statements.
Write a number from 1 to 4 on the line next to each statement.
strongly disagree 1 2 3 4 strongly
agree
1. ______ I have little control over the things that happen to me
2. ______ I can do just about anything I really set my mind to
3. ______ There is really no way I can solve some of the
problems I have
4. ______ There is little I can do to change many of the
important things in my life
5. ______ What happens to me in the future mostly depends on
me
6. ______ I often feel helpless in dealing with the problems of
life
7. ______ Sometimes I feel that I'm being pushed around in life
1. Prepare a codebook for this questionnaire, detailing each of
the variable names and codes to be used to prepare the data for

entry into SPSS
. (3 points)2. Using the
codebook you developed, describe how you would create value
labels for Question 3 (Education level). Describe the steps you
would use in SPSS.
(3 points)
3. Using SPSS, create a new data file for this questionnaire.
Enter some pretend data in this data file (for at least five cases).
(3
points)4. It is important to check your data set for errors
before conducting your major analyses.
(a) Describe how you would go about doing this using SPSS. In
particular, how would you identify cases that had values that
did not fall in the range of possible values for a particular
variable?
(3 points)
(b) Perform a check for errors on your pretend data file. Correct
any errors you find.
(3 points)
5. Using your pretend data file, calculate total scale scores for
the Mastery scale used in the questionnaire (make sure you
reverse the negatively worded items first). High scores on the
Mastery scale should represent high levels of mastery. Report
the mean and standard deviation for the Mastery scale.
(3 points)
6. Create a new variable by recoding the responses to Question
3 (education level) so that there are only two groups (Yr 10 and
Yr 12 = 0; University/College = 1).
(3 points)
7. Create a new age group variable (agegp4) that breaks the
sample into 4 groups:
18-25yrs = 1, 26-45yrs =2, 46-60yrs = 3, 61yrs and above = 4.
Remember to attach value labels to describe what each value in

the new variable represents.
(6 points)
Part B
1. A market researcher is interested in the coffee drinking habits
of males and females. He asks a sample of male and female
office workers to record the number of cups of coffee they
consume during a week.
(a) Which statistical technique could the researcher use to
determine if males and females differ in terms of the number
of cups of coffee consumed in a week? Explain why you have
chosen this technique.
(6 points)
(b) What assumptions should you check for when using the
technique that you chose in question 2(a) above.
(3 points)
2. The following output was obtained using SPSS.
Coefficientsa
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
-11.823

8.806
-1.343
.198
hours spent revising
.551
.171
.456
3.226
.005
anxiety
.104
.058
.179
1.796
.091
A-level entry points
1.989
.469
.581
4.239
.001
a. Dependent Variable: exam score
(a) Which parametric statistical technique was used to obtain
this output?
(3 points)
(b) What research question/s could be addressed using this
output?
(3 points)
(c) Interpret this output in terms of the research question/s you
gave in question 3(b), above.
(3 points)
3. A researcher is interested in assessing the impact of a number

of changes in a public health department on the job satisfaction
of employees. Before the changes are implemented the
researcher distributes a questionnaire to a sample of employees,
which measures their attitudes to their work and their overall
job satisfaction. The same questionnaire is distributed to the
same group of employees one month after the workplace
changes were implemented and again three months later.
(a) Which parametric statistical technique could the researcher
use to see if workers’ job satisfaction levels had changed across
the three time periods measured? Briefly justify your answer.
(3 points)
(b) What non-parametric technique (if any) could be used to
explore this question?
(3 points)
Part C
In this part, you will need to open the data file that accompanies
in dropbox folder
,
survey.sav. Details of the questionnaire, the scales
used, and the codebook are provided in dropbox.
1. Using the
survey.sav data file, report the descriptive statistics for
gender, age, marital status, and education level. Write up the
results of these descriptive statistics as they would appear in the
Method section of a research article.
(6 points)
2. (
Bonus Question) It is essential to check the reliability
of scales used in your study. Check the Cronbach alpha values

for the following scales: (
4 points)
(a) Mastery scale
(b) Life Satisfaction scale
(c) Perceived Control of Internal States scale
(d) Perceived Stress scale
3. A researcher is interested in exploring the possibility of
gender differences in levels of perceived stress (total score)
controlling for age (in years as continuous).
(a) Perform the appropriate statistical analysis to address this
question. Be sure to check that you have not violated any
assumptions.
(3 points)
(b) Report the conclusions
(
6 points)
4. The same researcher is interested in exploring the
relationship between perceived control (tpcoiss) and life
satisfaction. She suspects that higher levels of perceived control
would be associated with greater life satisfaction.
(a) Perform whatever analyses you feel are appropriate to
address this question (including assumption testing if
applicable).
(3 points)
(b) Describe the analyses you performed and report on these
analyses and the results, as you would in a research report.
(3 points)
5. A researcher is interested in exploring the effect of sex and
age group (age as categorical variable) on Life Satisfaction
scores.
(a) Using the sex and agegp3 variables, perform the appropriate
analyses to address this question. For this particular question, it
is not necessary to show assumption testing.

(3 points)
(b) Report the conclusions
(
6 points)
Part D
Using G power, estimate the sample size for following scenario.
A community health worker wants to compare two intervention,
A and B, for reduction of stress due to COVID pandemic. He
hypothesizes that intervention A (Group 1) will be better than
intervention B (Group 2), in terms of overall stress reduction.
He plans to get a match paired sample of participants from his
community and randomly assign them to one of the two
interventions. He decides to do matching based on demographic
variables. At the end of the experiment, which lasts 2 weeks, a
total PSS (total perceived stress score) will be estimated on
each participant. He also expects that the average difference in
total perceived stress score between the two groups will be
about 5 points. Furthermore, she also assumes the standard
deviation of total stress score for intervention A to be 5 and the
standard deviation for intervention B to be 8. The community
health worker wants to know the number of subjects needed
in each group and total sample size assuming equal
sized groups with 95% power. (Hint: Use G power to estimate
the total sample size. Also assume the correlation between
groups to be 0.5). You may attached screenshot from G*Power
to receive a partial credit for this question (
6 points)
6
-1-

Mandatory internal control and earnings management
Zilong Songa**, Ying Liua*,**, and Jiaxin Wang b
aSchool of Accounting, Nanjing University of Finance and
Economics, Nanjing, China; bSchool of Accounting,
Zhongnan University of Economics and Law, Wuhan, China
ABSTRACT
This paper examines whether the mandatory implementation of
an internal
control system influences listed firms’ earnings management in
China. We
use firms that are mandated for implementing internal control as
the treat-
ment group, and firms that do not implement internal control as
the control
group. We find that the mandatory implementation of an
internal control
system results in an increase in both real and accrual-based
earnings man-
agement. We also find that the extra institutional compliance
cost induced
by implementing a mandatory internal control system was the
main cause of
the increase in earnings management. Our conclusions thus
provide empiri-
cal evidence that differs from that on the developed market
regarding the
research about mandatory internal control and earnings
management.
KEYWORDS
Mandatory internal control
system; accrual-based
earnings management; real

earnings management
JEL
G38; D82; M41
1. Introduction
Along with the enactment of the Sarbanes-Oxley Act in the
United States in 2002, mandatory internal
control systems became the worldwide mainstream in corporate
internal control practices. Under the
influence of globalization, China’s internal control system has
undergone a transition from voluntary
to mandatory implementation. To fully implement an internal
control system in the Chinese listed
firms, the Ministry of Finance (MoF) of China and the China
Securities Regulatory Commission
(CSRC) jointly formulated the “Announcement on Implementing
Internal Control System for the
Main Board Listed Companies by Categories and Batches”
(hereafter referred to as the
“Announcement”). The “Announcement,” stipulates that all
listed companies on the Main Board
should establish an internal control system from 2012 onward.
However, given the costly expenses
involved in the construction of an internal control system, and
the differences in the nature of the
property rights and the economic basis of the listed companies
in China, the government decided to
implement the mandatory internal control system by categories
and batches.1
While the promulgation of the “Announcement” undoubtedly
had a critically positive effect on the
listed firms’ implementation of an internal control system, it is
noteworthy that, against this backdrop,

the levels of the listed firms’ earnings management increased
during the same period. We find that the
means and the medians of both real and accrual-based earnings
management of the listed companies
increased between 2009 and 2014. We wonder whether this
earnings management increase was really
caused by the promulgation of the “Announcement.” If so, what
was the channel through which the
“Announcement” influences the firms’ earnings management?
Traditional earnings management theories contend that, in a
stringent regulatory environment,
there is a substitutional relationship between real and accrual-
based earnings management (Zang
2012). However, when it comes to the effects of the policies
that might influence the listed firms’
CONTACT Jiaxin Wang [email protected] School of
Accounting, Zhongnan University of Economics and Law,
Building, No. 182, Nanhu Avenue, Donghu High-tech
Development Zone, Wuhan City, Hubei Province 430073, China
*Ying Liu is co-first author.
**These authors equally contributed to this work.
EMERGING MARKETS FINANCE AND TRADE
2022, VOL. 58, NO. 12, 3439–3453
https://doi.org/10.1080/1540496X.2022.2050903
© 2022 Taylor & Francis Group, LLC
http://orcid.org/0000-0003-2110-5111
http://www.tandfonline.com
https://crossmark.crossref.org/dialog/?doi=10.1080/1540496X.2
022.2050903&domain=pdf&date_stamp=2022-08-06

earnings management strategies, the traditional theories do not
apply to the Chinese context. This is
because mandatory internal control could impose heavy
institutional compliance costs upon firms,
which is confirmed by a substantial amount of research (Kinney
and Shepardson 2011). The excessive
compliance costs might impose excessive cost pressure on firms
(Iliev 2010), and cause firms to change
their earnings management strategies. This is especially factual
in China, as the Chinese economy is
currently undergoing a structural adjustment and thus its market
competition is extremely intense,
which strongly stimulates firms’ incentives to pursue financial
performance.
This study explores the effect of the implementation of a
mandatory internal control system on the
firms’ earnings management in the Chinese context. Taking the
promulgation of the “Announcement”
as the exogenous event, we test this effect using a difference-in-
difference (DID) method and a unique
panel data set from 6,981 publicly traded A-share main board
firm-year observations for the years
2009–2014 in China. We find that the promulgation of the
“Announcement” indeed resulted in the
increase in both real and accrual-based earnings management.
We also find that the extra institutional
compliance cost induced by implementing a mandatory internal
control system was the main cause of
the increase in earnings management.
This study contributes to related literature in three ways. First,
this paper extends the internal
control literature by enriching the research regarding the
economic consequences of mandatory
internal control. Second, this study complements the earnings

management literature that focuses
on the incentives of firms to evade monitoring and on the
substitutional relationship between real and
accrual-based earnings management. Third, by analyzing the
peculiarities of emerging economies, this
paper adds to the literature regarding public policy assessment.
Due to the differences between China
and Western countries, the internal control system formulated in
the “Announcement” in China is
quite different from that formulated under the framework of the
SOX Act of the United States. In
particular, the mandatory internal control system in China was
implemented by categories and
batches, which makes the research setting more interesting and
distinct. These differences make the
implementation mode and the economic consequences of the
Chinese internal control system
different from those in the US. We are thus the first to find that
the mandatory internal control
system in China, instead of acquiring its intended effects on
improving earnings quality, leads to firms’
distorted reporting behavior and a lower earnings quality.
Therefore, it is more accurate and practical
to consider the context-specific peculiarities when assessing
such mandated public policies.
The remainder of this paper is structured as follows: First, we
present a review of related literature
and develop hypothesis. Next, we describe our research method
and present the results of our analyses.
Finally, we provide conclusions and discuss implications.
2. Literature and Hypothesis
The extant research on mandatory internal control focuses on
the issue of the cost-benefit induced by

the system. Iliev (2010), for example, documents a positive
relationship between the SOX implemen-
tation and earnings quality. However, since implementing the
SOX regulations requires a substantial
number of expenses, primarily including the control system
development and maintenance, system
implementation and supervision, and internal control audit fees,
etc., others argue that a common
problem of mandatory internal control is how to balance the
relationship between implementation
costs and the enterprise development (Iliev 2010). Moreover,
Kinney and Shepardson (2011) point out
that the cost burden caused by the SOX Section 404 has a
greater impact on small companies.
Consequently, the issue of cost-benefit as it relates to
mandatory internal control remains unsolved.
In the sense that the implementation criteria have become more
standardized, and the scope of the
implementation has been expanded, the nature of China’s
internal control system has been trans-
formed from an inducing to a compulsory system. This is
reflected in the transition from the voluntary
implementation encouraged by the “Basic Standards for
Corporate Internal Control” (hereafter: the
“Standards”) in 2008 to the mandatory implementation
stipulated in the “Announcement” in 2012.
The supervision and penalties for inadequate implementation
have become simultaneously stricter.
3440 Z. SONG ET AL.
This transitional process could be justified by the mandatory
institutional transition hypothesis in the

institutional economic theory. Specifically, the government’s
intervention into policy implementation
could mitigate the problem of insufficient institutional supply
caused by an institutional transition that
is inducing, albeit not regulatory (Lin 1989).
However, such governmental intervention might have opposite
effects. One of such effects is the
excessive costs caused by mandated policy implementation. As
Iliev (2010) points out, “Section 404
costs and regulatory burden are far beyond what Congress
intended and well in excess of the benefits to
shareholders and management,” a mandatory institutional
arrangement does impose excessive costs to
firms. Related studies additionally confirm that mandatory
internal control causes substantial institu-
tional compliance costs. The 2004 Financial Executives
International Survey showed, for example, that
the average compliance cost of the SOX Act of the American
listed firms was approximately USD
4.36 million per year,2 which dramatically exceeded the USD
0.91 million3 that was originally
estimated by the US Securities and Exchange Commission
(SEC). Other research indicates that the
SOX Section 404 increased firms’ audit fees significantly
(Kinney and Shepardson 2011). In addition,
Kinney and Shepardson (2011) find that the implementation of
the SOX Section 404 (b) imposes
a heavier burden of audit costs on small companies, which
seriously hinders the growth of such
enterprises.
As a mandatory institutional arrangement, the “Announcement”
could bring about extra institu-
tional compliance costs (Iliev 2010), including explicit and
hidden costs. The “explicit cost” refers to

the actual expenses that firms incur by implementing a
mandatory internal control system; this
includes the cost of designing and implementing the system,
such as the fees paid to internal control
consulting organizations, the operation and maintenance costs
of an information system, and the
labor costs of relevant personnel. Internal control audit and
information disclosure costs are impor-
tant constituents of the explicit costs as well (Maher and Weiss
2010). The “hidden cost” refers to the
opportunity cost of a firms’ loss; this includes such things as
the decision-making mistakes caused by
an increasingly complicated process, the decrease in employee
initiative and work enthusiasm caused
by over-monitoring, and the decline in work efficiency caused
by employees’ resistance to strict
control. Although difficult to measure by accounting numbers,
these hidden costs have a negative
impact on corporate performance.
Specifically, the institutional compliance costs are reflected in
the internal control implementation
process. On the one hand, although mandatory internal control
helps to improve business manage-
ment security, the management is more concerned about the
extra costs, including the service fees for
purchasing technology, internal control audit fees, and the
implementation and maintenance fees of
the system. These costs typically require additional budget for
which it is difficult to generate
significant benefits in the short term, and thus would reduce
managerial performance. On the other
hand, from the employee perspective, many of them have some
opposition to the mandatory internal
control system. Since internal control requires strict approval
and monitoring of the employees’

operations, it typically reduces work satisfaction, leads to a
decline in labor productivity, and thus
increases the hidden costs for the system. The employees may
additionally consider the imposed
business management security to be contradictory to the
convenience of routine work. This is
particularly true in transitional economies, where the suspicion
of internal control exists overwhel-
mingly in the employees’ mind-set.
Given the deleterious effects, the extra institutional compliance
costs would be an essential concern
of the management. Since extra costs could undermine corporate
financial performance and thus
managerial performance, the performance-sensitive and self-
serving managers would attempt to
compensate for the explicit and potential losses (Chung, Firth,
and Kim 2002) caused by implementing
a mandatory internal control system. From this perspective,
earnings management would be a viable
option that is extremely likely to be used by managers. After the
promulgation of the
“Announcement,” the increase in institutional compliance costs
would severely reduce firms’ profits,
imposing excessively higher performance pressure on the
management. To meet or beat their
corporate financial targets, to secure managerial performance
remuneration, and to increase the
EMERGING MARKETS FINANCE AND TRADE 3441
probability of exercising their options (Bartov, Givoly, and
Hayn 2002), the managers may use the two
types of earnings management simultaneously (Zhu et al. 2015).

Qin, Cai, and Wei (2021) find that
managers manipulate the earnings management when facing
mandatory contributions, for example,
FASB mandates disclosure of pension asset composition and a
description of investment strategy
under SFAS 132 R. In addition, existing research points out that
due to the relative lack of institutional
investor supervision, it is difficult for external investors in
China to detect earnings management
behaviors (Gao et al. 2020). Therefore, we anticipate that the
promulgation of the “Announcement”
would lead to an increase in both real and accrual-based
earnings management. Based on the above
analysis, we propose the following hypothesis:
H: Compared to voluntary implementation, the mandatory
implementation of an internal control
system is more likely to increase both accrual-based earnings
management and real earnings
management.
3. Research Design
3.1. Sample and Data
To test our conjecture empirically, we take the promulgation of
the “Announcement” in 2012 as the
benchmark and use all of the A-share listed firms on the main
board in Shanghai and Shenzhen Stock
Exchanges in 2009–2014 as the sample. The years 2009–2014
are selected as the sample interval
because China conducted a major reform of the internal control
system of enterprises in 2008 and
implemented it in the following year.4 According to the
“Announcement,” the year 2014 is designated
as the completion period because all the firms listed on the

Main Board should have their mandatory
internal control construction completed by then. Our main data
source is the CSMAR database, which
contains both financial and non-financial information of the
Chinese listed firms. The initial sample
contains all of the data for the three years before and after the
promulgation of the “Announcement.”
The sample is filtered according to the following procedures: 1)
We exclude the firms that belong to
the financial and insurance industries, and those that have been
marked ST, *ST during our sample
period. 2) We exclude the firms with missing financial data. 3)
To avoid the influence of extreme
outliers, we winsorize all of the continuous firm-level variables
at the 1% and 99% levels. Using these
procedures, we obtain 6,977 observations.
3.2. Methods and Variables
3.2.1. Accrual-based Earnings Management Models
Drawing on Dechow, Sloan, and Sweeney (1995), we use cross-
sectional Jones Model to calculate
discretionary accruals. We do OLS regressions by years and
industries with Models (1), and use the
estimations to calculate the discretionary accruals with Model
(2) and (3).
TACi;t
TAi;t� 1
¼ β1
1
TAi;t� 1
þ β2

ΔSalesi;t
TAi;t� 1
þ β3
PPEi;t
TAi;t� 1
þ εi;t (1)
NDAi;t
TAi;t� 1
¼ β1
1
TAi;t� 1
þ β2
ΔSalesi;t � ΔARi;t
TAi;t� 1
þ β3
PPEi;t
TAi;t� 1
(2)
DAi;t ¼
TACi;t
TAi;t� 1
�
NDAi;t

TAi;t� 1
(3)
3442 Z. SONG ET AL.
where DA represents discretionary accruals. The higher DA is,
the more accrual-based earnings
management there is. TAC is total accruals, computed as net
profit minus net operating cash flows.
TA is total assets. Sales is the change in net sales. PPE is the
original value of fixed assets. NDA is non-
discretionary accruals. AR is the change in accounts receivable.
3.2.2. Real Earnings Management Models
Consistent with existing literature (Cohen, Dey, and Lys 2008;
Gunny 2010; Shen et al. 2020; Xu
and Rao 2021; Zang 2012), we use abnormal production costs,
abnormal discretionary expenses,
and abnormal operation cash flows to estimate real earnings
management. We do OLS estima-
tion by years and industries with Models (4) to (6),
respectively. The abnormal manipulations,
including abnormal production costs (AB PROD ROA),
abnormal discretionary expenses
(AB DISX ROA) and abnormal operation cash flows (AB CFO
ROA), are calculated as the actual
values minus their estimations.
PRODi;t
TAi;t� 1
¼ β0 þ β1

1
TAi;t� 1
þ β2
Salesi;t
TAi;t� 1
þ β3
Salesi;t
TAi;t� 1
þ β4
ΔSalesi;t� 1
TAi;t� 1
þ εi;t (4)
DISXi;t
TAi;t� 1
¼ β0 þ β1
1
TAi;t� 1
þ β2
Salesi;t� 1
TAi;t� 1
þ εi;t (5)
CFOi;t
TAi;t� 1

¼ β0 þ β1
1
TAi;t� 1
þ β2
Salesi;t
TAi;t� 1
þ β3
ΔSalesi;t
TAi;t� 1
þ εi;t (6)
where PROD represents total production cost, which equals to
cost of goods sold and the change
in inventories. DISX means discretionary expenses, computed
as the sum of selling, general, and
administrative expenses (SG&A). CFO means net operation cash
flows. TA is firm’s total assets. S
is net sales. S is the change in net sales. ROA is return on
assets.
In accordance with Zang (2012), we then calculate the indicator
for real earnings management
(REM ROA) with the following model:
REM ROA ¼ AB PROD ROA � AB DISX ROA � AB OCF
ROA (7)
where the larger REM ROA is, the more real earnings
management there is.
3.2.3. Difference-in-difference (DID) Model

We analyze our research questions using a dynamic DID model.
Unlike a static DID model,
which applies to situations where a policy dummy variable only
occurs once, a dynamic DID
model is more suitable to situations where a policy dummy
variable occurs multiple times. As
noted above, the “Announcement” implements the mandatory
internal control system by cate-
gories and batches. Therefore, a dynamic DID model is a better
option for analyzing the effects
of the “Announcement.” While the premise of the DID method
is the random selection of both
the experimental and the control groups, the unmatched firms
from both groups may have
certain differences in the level of earnings management per se,
which might influence the
robustness of our conclusion. In considering this issue, we do
propensity score matching
(PSM) for the samples between the experimental and the control
groups. Since the samples in
the experimental group with PSM are easier to match with those
that have similar characteristics
in the control group, the PSM-DID method could effectively
deal with the design of intertem-
poral quasi-natural experiments, thus better revealing the
intrinsic characteristics of mandatory
implementation by categories and batches (Gong et al. 2016).
To be precise, we use all of the
control variables included in the main regression models as
characteristic variables, and we
adopt probit regressions to conduct one-to-one matching with

the estimations. To test the
relationship between the mandatory implementation and real
earnings management, we design
the following DID model:
EMi;t ¼ β0 þ β1AFTERi;t þ β2TREATi;t þ β3AFTERi;t �
TREATi;t þ YEARþ INDUSTRY þ γXi;t
þ εi;t
(8)
where EM represents earnings management, proxied by accrual-
based earnings management (DA)
and real earnings management (REM ROA). We also include
three methods of real activities manip-
ulation (AB PROD ROA, AB DISX ROA and AB CFO ROA) as
robustness checks. AFTER is
a dummy, taking the value 1 after the policy implementation,
and 0 in the years before the policy.
TREAT is to differentiate the treatment and the control groups,
taking the value 1 if a firm belongs to
the treatment group, and 0 if a firm belongs to the control
group. X represents the other control
variables. The definitions of all of the variables are displayed in
Table 1.
4. Empirical Results
4.1. Descriptive Statistics
The descriptive statistics of the main variables are presented in
Table 2. The standard deviations of the
accrual-based earnings management (0.104) and the real
earnings management (0.264) are relatively
high, meaning that there is a big difference in the earnings
management among the Chinese listed

firms. In addition, the mean of LEVERAGE (0.514) indicates
that the leverage ratios of the Chinese
listed firms are relatively high. The means of LASSET (22.36)
and ROA (0.043) indicate that the
average scale of the assets and profitability of the Chinese
listed firms is not very ideal. Moreover, the
standard deviations of BM; TENURE; LASSET and CR are all
quite high, indicating high fluctuations
of book-to-market ratios, auditors’ terms of service, firm scales
and current ratios among the Chinese
listed firms.
Table 1. Variable definitions.
Variables Definition
Variables employed in the DID Model
DA Accrual-based earnings management, calculated with Model
(3).
AB PROD ROA ROA-adjusted abnormal production costs,
calculated with Model (4).
AB DISX ROA ROA-adjusted abnormal discretionary expenses,
AB OCF ROA ROA-adjusted abnormal operation cash flows,
REM ROA Composite indicator of real earnings management,
TREAT Group differentiation dummy, taking the value 1 if a
firm has implemented internal control mandatorily, and 0
otherwise.
AFTER Implementation year dummy, taking the value 1 in the
mandatory implementation year and the years after, and 0
otherwise.
GROWTH The growth rate of operation income.

BM Book to market value.
LNLAG Audit delay, computed as the natural logarithm of the
length between January 1 and audit report signing date.
TENURE The length of auditor’s term of service.
LASSET The natural logarithm of total assets.
INVREC Computed as the sum of inventory and accounts
receivable divided by average total assets.
ROA Return on assets, computed as net profit divided by
average total assets.
LEVERAGE Liability ratio, computed as total liabilities divided
by total assets.
CR Current ratio, computed as total current assets divided by
total current liabilities.
AGEEST Firm age, proxied by firm’s listing length.
BOAIND Proportion of independent directors on board.
3444 Z. SONG ET AL.
4.2. Empirical Results
The results of the DID test for the relationship between the
mandatory internal control and the
firms’ accrual-based earnings management are reported in Panel
A of Table 3. The results of
Column (1) show that DA is significantly and positively
correlated with TREAT � AFTER,
meaning that, compared with that of the firms that have not
implemented internal control,
the extent of the accrual-based earnings management of the
firms that implemented the internal
control mandatorily increased significantly after the
promulgation of the “Announcement.”
Columns (2) and (3) display the results of the tests conducted in
the two groups with either

positive or negative accrual-based earnings management,
respectively. The coefficient between
DA and TREAT � AFTER is significantly positive in the group
with positive accrual-based
earnings management, but insignificant in the group with
negative accrual-based earnings
management. These results show that, after the implementation
of a mandatory internal control
system, the management is more inclined to manipulate the
earnings upward. This finding also
confirms the channel of institutional compliance cost through
which the mandatory internal
control influences firms’ earnings management.
The results of the DID test for the relationship between the
mandatory internal control and the
firms’ real earnings management are reported in Panel B of
Table 3. Column (1) displays the result of
the test with the composite indicator of the real earnings
management. REM ROA is significantly and
positively correlated with TREAT � AFTER, meaning that, the
extent of the real earnings manage-
ment of the firms in the experimental group increased
significantly after the promulgation of the
“Announcement.” Columns (2) to (4) show the results of the
three types of real activities manipula-
tion. AB PROD ROA is positively and significantly correlated
with TREAT � AFTER, indicating that,
the firms in the treatment group tended to increase earnings
through over-production and scale effect,
leading to higher total production costs. The coefficient
between AB DISX ROA and TREAT �
AFTER is insignificant, indicating that the influence of the
mandatory internal control implementa-
tion on discretionary expenses is trivial. AB OCF ROA is
negatively and significantly correlated with

TREAT � AFTER, suggesting that, after the promulgation of
the “Announcement,” the firms in the
treatment group tended to increase earnings through relaxed
credit policies, leading to lower opera-
tion cash flows.
In summary, the results show that both the accrual-based and
the real earnings management
increased significantly after the implementation of a mandatory
internal control system. This finding
thus verifies our research hypothesis.
Table 2. Descriptive statistics of the main variables.
Variables N Mean SD Min P25 P50 P75 Max
DA 6977 0.0199 0.1036 −0.3402 −0.0297 0.0144 0.0630 0.4744
AB PROD ROA 6754 −0.0704 0.1483 −0.6049 −0.1328 −0.0610
−0.0020 0.4506
AB DISX ROA 6754 0.0362 0.0779 −0.1760 −0.0024 0.0220
0.0612 0.3569
AB OCF ROA 6754 0.0264 0.1010 −0.3657 −0.0200 0.0281
0.0793 0.3412
REM ROA 6754 −0.1320 0.2638 −1.0651 −0.2416 −0.1119
−0.0071 0.7625
GROWTH 6977 0.1972 0.5140 −0.6041 −0.0171 0.1130 0.2690
3.8906
BM 6977 1.1346 1.0174 0.0940 0.4651 0.7902 1.4250 4.9835
LNLAG 6977 4.4793 0.2579 3.3673 4.3820 4.4886 4.6821
4.7875
TENURE 6977 5.1316 3.8042 1 2 4 7 16
LASSET 6977 22.3587 1.2928 18.9563 21.4734 22.1905
23.1483 25.7349
INVREC 6977 0.3481 0.3260 0.0000 0.1287 0.2642 0.4396
1.5253
ROA 6977 0.0430 0.0592 −0.2025 0.0137 0.0365 0.0689 0.2517

LEVERAGE 6977 0.5143 0.2059 0.0395 0.3647 0.5212 0.6668
1.0974
CR 6977 1.7696 1.9395 0.2064 0.9124 1.3077 1.9331 23.7967
AGEEST 6977 2.7115 0.3456 1.0986 2.5649 2.7726 2.9444
3.2958
BOAIND 6977 0.3685 0.0537 0.3077 0.3333 0.3333 0.3846
0.5714
Table 3. Mandatory internal control and firms’ earnings
management.
Panel A: Mandatory Internal Control and Firms’ Accrual-based
Earnings Management
Variables
(1) (2) (3)
DA Positive DA Negative DA
TREAT −0.016*** −0.014** 0.001
(−2.71) (−2.54) (0.13)
AFTER 0.003 0.008 0.014**
(0.34) (1.08) (2.06)
TREAT � AFTER 0.012* 0.011* −0.004
(1.87) (1.80) (−0.70)
GROWTH −0.000 0.035*** −0.035***
(−0.00) (7.40) (−8.34)

BM 0.004* −0.003 0.011***
(1.90) (−1.30) (5.71)
LNLAG −0.001 0.002 −0.008
(−0.23) (0.31) (−1.53)
TENURE −0.000 −0.000 −0.000
(−0.94) (−0.97) (−0.31)
LASSET 0.004** −0.005*** 0.007***
(2.10) (−2.98) (5.12)
INVREC 0.043*** 0.031*** 0.008
(5.28) (3.66) (1.16)
ROA 0.431*** 0.261*** 0.234***
(11.01) (6.44) (7.68)
LEVERAGE 0.004 0.074*** −0.067***
(0.36) (5.01) (−6.39)
CR 0.002** 0.002** −0.000
(2.11) (2.52) (−0.81)
AGEEST 0.001 0.009* −0.003
(0.20) (1.90) (−0.56)
BOAIND −0.002 0.023 −0.009
(−0.07) (0.85) (−0.40)
YEAR Yes Yes Yes
INDUSTRY Yes Yes Yes
Constant −0.102** 0.099** −0.164***
(−2.25) (2.21) (−4.30)
N 6977 4122 2855

R2 0.129 0.220 0.245
Panel B: Mandatory Internal Control and Firms’ Real Earnings
Management
Variables
(1) (2) (3) (4)
REM ROA AB PROD ROA AB DISX ROA AB OCF ROA
TREAT −0.058*** −0.030*** 0.017*** 0.011*
(−3.38) (−3.43) (2.71) (1.95)
AFTER 0.051*** 0.025** −0.019*** −0.009
(2.74) (2.34) (−3.03) (−1.26)
TREAT � AER 0.048*** 0.017** −0.016*** −0.014**
(3.35) (2.23) (−3.75) (−2.39)
GROWTH 0.013 0.006 0.009*** −0.007
(1.05) (0.86) (2.82) (−1.41)
BM 0.017*** 0.011*** −0.007*** 0.000
(3.15) (3.76) (−3.74) (0.12)
LNLAG −0.004 −0.006 0.004 −0.006
(−0.24) (−0.83) (0.94) (−1.05)
TENURE −0.001 −0.001 0.000 0.000
(−0.84) (−1.04) (0.34) (0.38)
LASSET 0.015*** 0.009*** −0.006*** 0.001
(2.97) (3.44) (−3.39) (0.68)
INVREC 0.200*** 0.124*** −0.012* −0.061***

(9.22) (10.59) (−1.65) (−8.85)
ROA −1.461*** −0.864*** 0.162*** 0.433***
(−13.58) (−14.76) (4.28) (12.75)
LEVERAGE −0.026 −0.028 0.012 −0.014
(−0.74) (−1.60) (1.03) (−1.18)
(Continued)
3446 Z. SONG ET AL.
4.3. Robustness Checks
4.3.1. Stage-by-stage Test
We create three dummy variables, where Post_1 indicates that
the sample year is one year before the
enforcement of internal control; Post1 indicates that the sample
year is the year when the internal
control is implemented; Post1+ indicates that the sample year is
all years after the implementation of
internal control. By multiplying these three dummy variables
with the dummy variable TREAT, we
observe the dynamic effects of the mandatory implementation of
internal control on earnings quality.
Table 4 displays the results. We find that the coefficients of
TREAT � Post_1 are not significant.
This indicates that before the mandatory implementation of
internal control, there is no significant
difference in earnings quality between the treatment group and
the control group, for both accrual-
based earnings management and real earnings management. But
the coefficients of TREAT � Post1

Table 3. (Continued).
Panel B: Mandatory Internal Control and Firms’ Real Earnings
Management
Variables
(1) (2) (3) (4)
REM ROA AB PROD ROA AB DISX ROA AB OCF ROA
CR 0.008*** 0.004** −0.001 −0.003***
(3.04) (2.53) (−0.77) (−3.32)
AGEEST 0.014 0.011 −0.003 0.002
(0.96) (1.43) (−0.58) (0.34)
BOAIND −0.082 −0.043 0.037 −0.017
(−0.97) (−0.97) (1.14) (−0.64)
YEAR Yes Yes Yes Yes
INDUSTRY Yes Yes Yes Yes
Constant −0.415*** −0.214*** 0.126*** 0.059
(−3.11) (−3.06) (2.66) (1.32)
N 6754 6754 6754 6754
R2 0.249 0.274 0.139 0.170
***, ** and * indicate statistical significance at 1%, 5%, and
10% levels respectively.
Table 4. Stage-by-stage test.
Variables

(1) (2) (3) (4) (5)
DA REM ROA AB PROD ROA AB DISX ROA AB OCF ROA
TREAT −0.017*** −0.044** −0.204*** 0.014** 0.026**
(−2.60) (−2.27) (−4.68) (2.05) (2.19)
Post_1 −0.008 0.016 0.082 −0.016** −0.037
(−0.87) (0.59) (0.79) (−1.97) (−1.36)
Post1 −0.002 0.057 −0.229 −0.034*** −0.006
(−0.15) (1.55) (−1.64) (−2.60) (−0.24)
Post1+ 0.002 0.102** −0.704*** −0.053*** −0.014
(0.11) (2.12) (−4.62) (−3.03) (−0.52)
TREAT � Post 1 0.005 −0.010 0.028 −0.006 0.002
(0.70) (−0.55) (0.40) (−1.30) (0.11)
TREAT � Post1 0.013* 0.035* 0.255*** −0.014*** −0.054***
(1.74) (1.90) (3.20) (−2.59) (−3.39)
TREAT � Post1þ 0.017** 0.029* 0.294*** −0.009* −0.051***
(2.25) (1.65) (4.66) (−1.75) (−3.57)
Control variables Yes Yes Yes Yes Yes
YEAR Yes Yes Yes Yes Yes
INDUSTRY Yes Yes Yes Yes Yes
N 6977 6754 6754 6754 6754
R2 6977 6754 6754 6754 6754

and TREAT � Post1+ are significant, and carry the right signs,
indicating that after the mandatory
implementation of internal control, the earnings quality of the
treatment group is significantly worse
than that of the control group. This finding verifies our main
results.
4.3.2. Placebo Test
In line with Tan et al. (2015), we conduct placebo tests by
pushing the policy execution time
forward. If the coefficient of the interaction term becomes
insignificant after changing the policy
execution time, this would indicate that the stimulating effect
on the firms’ earnings manage-
ment comes from the exogenous event of the “Announcement.”
Based on this perspective, we
choose 2010 as the placebo exogenous event and we re-do the
DID test with Model (8). These
results are reported in Table 5. We find that the coefficient of
the interaction term TREAT �
AFTER is insignificant, which confirms that it is indeed the
exogenous event of the
“Announcement,” rather than other policy changes or random
factors, that increased the
firms’ earnings management.
4.3.3. Other Robustness Tests
In addition to the above-mentioned tests, we conduct the
following robustness tests. Because of space
limitations, the results are not reported.
First, we do the DID test again with newly constructed
dependent variables. Consistent with Cohen,
Dey, and Lys (2008), we re-estimate the composite indicator of

real earnings management (REM). The
results show that the newly estimated indicators of real earnings
management are still positively and
significantly correlated with the interaction term TREAT �
AFTER, thus demonstrating the robust-
ness of our previous conclusion.
Second, we conduct quantile regressions with 10, 25, 50, 75 and
90% percentiles of the earnings
management indicators. We find that the positive correlation
between the earnings management
indicators and TREAT � AFTER displays a decreasing trend as
the percentiles get lower, which shows
the robustness of our conclusion.
Third, we estimate the nonparametric local linear regression
coefficients for the three bandwidths
of Lwald100, Lwald50 and Lwald150. We find that the
estimated coefficients of the triangular and
rectangular cores of the earnings management indicator are
generally significantly positive, thus
verifying our conclusion.
Table 5. Placebo test.
Variables
(1) (2) (3) (4) (5)
DA REM ROA AB PROD ROA AB DISX ROA AB OCF ROA
TREAT −0.017** −0.035* −0.023** 0.012* 0.004
(−2.36) (−1.77) (−2.22) (1.68) (0.60)
AFTER −0.030*** −0.003 −0.003 −0.017** 0.022**
(−2.88) (−0.13) (−0.18) (−2.41) (2.20)

TREAT � AFTER 0.011 0.007 −0.001 −0.007 −0.005
(1.53) (0.45) (−0.11) (−1.45) (−0.61)
N 5632 5415 5415 5415 5415
R2 0.127 0.264 0.267 0.163 0.186
3448 Z. SONG ET AL.
Finally, we randomly select the same number of samples from
the original regression model as
a new experimental group and the remaining samples as a new
control group. We do the DID test
again with the new groups and we repeat the simulations 5,000
times. The results show that the
coefficients of TREAT � AFTER are all insignificant,
indicating that the main regression results are
not driven by accidental factors; therefore, the conclusion is
robust.
5. Extensions
5.1. Channel
As discussed above, the institutional compliance cost induced
by mandatory internal control is
the main factor that stimulates the firms’ earnings management.
Under this conceptual frame-

work, we can identify the channel from the following two
aspects: First, the implementation of
a mandatory internal control system is very likely to cause the
institutional compliance costs to
increase. Second, the extra compliance cost pressure spurs the
management to use more earnings
management.
To verify the first aspect of the channel, we replace the
dependent variable of Model (8) with the
institutional compliance cost, proxied by three variables
(Inter_Audit_Fee, Mana_fee and Audit_fee).
Inter_Audit_Fee indicates the natural logarithm of the internal
control audit fees paid by listed
Table 6. Channel.
Panel A: The Influence of Mandatory Internal Control on
Institutional Compliance Cost
Variables
(1) (2) (3) (4) (5)
Institutional compliance cost Internal control
quality
Classification shifting
Inter_Audit_Fee Mana_fee AuditFee ICQ DCE
TREAT −0.325 0.112*** 0.025 2.029 −0.000
(−1.18) (2.65) (0.57) (0.52) (−1.08)
AFTER −0.433* −0.028 −0.029 8.499 −0.000*
(−1.71) (−0.67) (−0.76) (1.02) (−1.76)

TREAT � AFTER 0.584** 0.064** 0.222*** −20.048***
−0.000**
(2.39) (2.16) (8.17) (−4.07) (−2.32)
N 2195 6382 6699 5438 6981
R2 0.492 0.776 0.625 0.365 0.286
Panel B: The Influence of Cost Pressure on Earnings
Management
Variables
(1) (2) (3) (4)
Low financial
performance
pressure
High financial
performance
pressure
Low financial
performance
pressure
High financial performance
pressure

DA DA REM ROA REM ROA
TREAT −0.020*** −0.026*** −0.041 −0.044**
(−2.62) (−3.08) (−1.59) (−2.40)
AFTER 0.001 −0.008 0.114*** −0.001
(0.14) (−0.67) (4.05) (−0.06)
TREAT � AFTER 0.009 0.026*** −0.008 0.061***
(1.10) (2.73) (−0.40) (3.29)
Control variables Yes Yes Yes Yes
YEAR Yes Yes Yes Yes
INDUSTRY Yes Yes Yes Yes
Coefficient difference 1.97 6.50**
(0.160) (0.011)
N 3303 3674 3143 3611
R2 0.064 0.128 0.189 0.194
10% levels respectively (two-tailed).
companies; Mana_fee represents the natural logarithm of the
administrative fees of the listed compa-
nies for the current year; Audit_fee denotes the natural
logarithm of the listed firms’ annual report
audit fees. The results are displayed in Columns (1)-(3) of Panel
A of Table 6. The interaction term
TREAT � AFTER is significantly and positively correlated with
all the three measures of institutional
compliance costs, indicating that the implementation of a

mandatory internal control system caused
the institutional compliance costs to increase.
To test the second dimension of the channel, we conduct a
group test based on the firms’ financial
performance pressure, proxied by an indicator of whether the
corporate financial performance was
higher or lower than the average industrial level. We expect that
higher financial performance pressure
would create stronger incentives for managers to manipulate the
corporate financial performance,
leading to a stronger effect of the “Announcement” on the
earnings management. The results are
reported in Panel B of Table 6. The coefficients of TREAT �
AFTER in the group with low perfor-
mance pressure is insignificant, while those in the high-pressure
group are significantly positive. This
finding holds for both the accrual-based and the real earnings
management. These results indicate that
the stimulating effect of the “Announcement” on the firms’
earnings management is stronger in the
group with higher performance pressure, while no such an effect
exists in the group with lower
pressure. Taken together, the channel is verified.
5.2. More Effects of the Mandatory Internal Control in a
Transitional Economy
As discussed above, the extra institutional compliance costs
may create resistance in managers and
employees toward the implementation of an internal control
system. To verify this logic, we replace
the dependent variable of Model (8) with internal control
quality (ICQ), proxied by the Dibo Internal
Control Index of the Chinese Listed Companies. The Dibo Index
consists of comprehensive indicators

of internal control qualities such as the implementation of
corporate strategy, the realization of
business objectives, and asset security. It covers the five
internal control objectives stipulated in the
“Standards,” and thus is able to fully measure firms’ internal
control quality. In line with Schroeder
and Shepardson (2015), we add two more control variables5 to
Model (8). The results are reported in
Column (4) of Panel A of Table 6. The interaction term TREAT
� AFTER is significantly and
negatively correlated with ICQ, indicating that the
implementation of a mandatory internal control
system had diminished the internal control quality. This means
that the internal control quality
depends on both the design and the contents of the system as
well as the implementation mode.
To further confirm that the increase in earning management was
driven by the firms’ cost pressure,
we consider another type of earnings management, i.e.,
classification shifting. In contrast to the
traditional accrual-based or real earnings management,
classification shifting only changes the earn-
ings structure within the income statement, without affecting
the firms’ net profit or actual operating
performance (McVay 2006). Based on the logic of this study,
high institutional compliance costs create
strong incentives for enterprises to manipulate profits upward,
which means that the impact of
a mandatory internal control on earnings management would be
more significant. Since classification
shifting does not affect the book value of the firms’ profit and
thus does not help to alleviate the cost
pressure, we expect that the management would reduce the use
of classification shifting after the
implementation of a mandatory internal control system. To test

this conjecture, we replace the
dependent variable of Model (8) with classification shifting
(DCE).6 The results are displayed in
Column (5) of Panel A of Table 6. The interaction term TREAT
� AFTER is significantly and
negatively correlated with DCE, indicating that the
implementation of a mandatory internal control
system would influence firms’ preference for different types of
earnings management. To be more
exact, the management prefers accrual-based and real earnings
management to classification shifting.
This denotes that the purpose of managers’ using real and
accrual-based earnings management is to
both meet and beat their financial performance targets, and to
compensate for the extra cost pressure
caused by the mandatory internal control.
3450 Z. SONG ET AL.
5.3. Long-term Effect of Mandatory Internal Control on
Earnings Quality
Given that what we have found about the effect of the
mandatory implementation of internal control
on earnings quality may be short-term effects, the mandatory
implementation of internal control may
not affect the earnings quality in the long run. To test this
conjecture, we delete observations with
AFTER equal to 1 in the whole sample, and add observations of
2015–2016, to examine the long-term
effect of mandatory implementation of internal control on
accrual-based and real earnings manage-
ment of listed companies. Table 7 presents the results. We find
that, there is no significant difference in

earnings management between listed companies subject to
mandatory internal control and those
otherwise. That is, although the mandatory implementation of
internal control draws a negative
impact on firms’ earnings quality in the short term, this impact
will disappear in the long run.
6. Conclusion
Taking the promulgation of the “Announcement” by the MoF of
China and the CSRC as the exogenous
event. We find that, the mandatory implementation of an
internal control system in China is more likely
to stimulate the firms’ real and accrual-based earnings
management. Furthermore, we find that the extra
institutional compliance cost is an important channel through
which mandatory internal control
stimulates the firms’ earnings management. In addition, the
results show that the firms’ internal control
quality did not improve after the promulgation of the
“Announcement,” which may be the result of the
resistance brought by the extra compliance cost among the
firms’ management and employees. In
examining the impact of mandatory internal control on
classification shifting, we find that, unlike
accrual-based and real earnings management, classification
shifting was reduced significantly after the
“Announcement.” This finding indicates that the increase in the
firms’ earnings management was
driven by the managers’ incentive to beat or meet their financial
performance targets, and thus confirms
our conclusion that the extra cost pressure imposed by the
mandatory internal control was the main
cause of the increase in the firms’ earnings management.
These findings have several implications both for policy-makers

and for the research related to
internal control practices. First, in contrast to that on the
developed markets, such as the US, where the
implementation of the SOX Act has improved firms’ internal
control quality, mandatory internal
control in emerging economies, such as China, would have
contradictory effects, causing the dete-
rioration of internal control quality, and even more, a decline in
earnings quality. Therefore, manda-
tory internal-control-related studies should differentiate the
research contexts to provide more reliable
conclusions. In this sense, this study provides new theoretical
and empirical evidence for the reform of
the internal control systems in transitional economies. Second,
there are practical implications in the
finding that the excessive institutional compliance cost brought
by the mandatory internal control was
the main cause of the increase in earnings management. Thus,
improving measures could be taken on
Table 7. Long-term effect of mandatory internal control on
earnings quality.
(1) (2) (3) (4) (5)
DA REM_ROA AB_PROD_ROA AB_DISX_ROA
AB_OCF_ROA
TREAT −0.008 −0.044** −0.043*** 0.001 0.000
(−1.48) (−2.33) (−3.29) (0.23) (0.05)
AFTER −0.030*** −0.051** −0.153*** −0.045*** −0.056***
(−4.01) (−2.02) (−7.49) (−7.50) (−7.19)
TREAT×AFTER 0.009 0.030 0.030 0.004 −0.004
(1.43) (1.26) (1.47) (0.88) (−0.55)

N 5818 5789 5789 5789 5789
R2 0.177 0.172 0.173 0.202 0.200
10% levels respectively (two-tailed).
both regulatory and implementing levels. On the regulatory
level, the internal control system should
be further improved, and the responsibilities for internal control
information disclosure and internal
control violations should be further clarified. On the
implementation level, enterprises should link
internal control responsibility with the employees’ performance
evaluation, which would help to
reduce the institutional compliance costs and diminish the
incentives for earnings manipulation.
Notes
1. The “Announcement” stipulates that both the central and the
local state-owned companies listed on the Main
Board should fully implement an internal control system
beginning in 2012; the non-state-owned companies
listed on the Main Board with a total market capitalization of
more than RMB 5 billion before December 31, 2011,
and with an average net profit of more than RMB 30 million
between 2009 and 2011 should fully implement an
internal control system beginning in 2013; Other companies

listed on the Main Board should fully implement an
internal control system beginning in 2014.
2. Date source: FEI Survey: Sarbanes-Oxley Compliance Costs
Are Dropping[R]. Financial Executives Research
Foundation, 2006,
http://www.fei.mediaroom.com/index.php?s=43&item=74.
3. Date source: SEC. Final Rule: Management’s Reports on
Internal Control over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports
(Release No. 33–8238) [S]. Washington, D. C.:
SEC Government Printing Office, 2003, http://www.
Sec.gov/rules/final/32-8238.htm.
4. This is formulated in the “Standards.”
5. They are a dummy of whether there is a material weakness in
the internal control (MW), and the natural
logarithm of the sum of the inventory turnover length and the
accounts receivable turnover length (OP CYCLE).
6. For the calculation of classification shifting please refer to
McVay (2006).
Disclosure statement
No potential conflict of interest was reported by the author(s).
Funding
Jiaxin Wang acknowledges the financial support from National
Natural Science Foundation of China [Project
No. 72102229], Ministry of Education in China [Project No.
20YJC630143] and Zhongnan University of Economics
and Law [Project No. 2722021BZ030]. Zilong Song
acknowledges the financial support from Ministry of Education

in
China [Project No. 19YJC790113], National Natural Science
Foundation of China [Project No. 71802105].
ORCID
Jiaxin Wang http://orcid.org/0000-0003-2110-5111
References
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meeting or beating earnings expectations. Journal of Accounting
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Chung, R., M. Firth, and J.-B. Kim. 2002. Institutional
monitoring and opportunistic earnings management. Journal of
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based earnings management in the pre-and post-Sarbanes-
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Detecting earnings management. The Accounting Review
70:193–225.
Gao, H., Z. Shen, Y. Li, X. Mao, and Y. Shi. 2020. Institutional
investors, real earnings management and cost of equity:
Evidence from listed high-tech firms in China. Emerging
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of privatization: evidence from china’s split share
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and real activity earnings management at the back door:

Evidence from Chinese reverse mergers. Pacific-Basin Finance
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https://doi.org/10.1111/j.1911-3846.2010.01029.x
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https://doi.org/10.1111/j.1540-6261.2010.01564.x
https://doi.org/10.1111/j.1475-679X.2011.00400.x
https://doi.org/10.2308/accr.2006.81.3.501
https://doi.org/10.1108/CFRI-01-2021-0020
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https://doi.org/10.1016/j.pacfin.2015.01.008
Copyright of Emerging Markets Finance & Trade is the property
of Taylor & Francis Ltd and
its content may not be copied or emailed to multiple sites or
posted to a listserv without the
copyright holder's express written permission. However, users
may print, download, or email
articles for individual use.
Abstract1. Introduction2. Literature and Hypothesis3. Research
Design3.1. Sample and Data3.2. Methods and Variables3.2.1.
Accrual-based Earnings Management Models3.2.2. Real
Earnings Management Models3.2.3. Difference-in-difference
(DID) Model4. Empirical Results4.1. Descriptive Statistics4.2.
Empirical Results4.3. Robustness Checks4.3.1. Stage-by-stage
Test4.3.2. Placebo Test4.3.3. Other Robustness Tests5.
Extensions5.1. Channel5.2. More Effects of the Mandatory
Internal Control in a Transitional Economy5.3. Long-term
Effect of Mandatory Internal Control on Earnings Quality6.
ConclusionNotesDisclosure statementFundingORCIDReferences

Assignment Content
1.
Top of Form
RerekvklkRead the article entitled, “Mandatory internal control
and earnings management”.
Write a 700- to 1,050-word summary of the article in a Word
document.
This is a summary
in your own words of the article you read. Be sure to
also address in the summary the item below under Apply.
Include in the summary and Reference page the title and
reference in APA format of the article you read.
Apply what you learned to your professional life. How could
you use the information on your job?
Format your paper consistent with APA standards. Check out
the APA guidelines under
Resources below (
Center for Writing Excellence > APA Sample Template
Master's Level -- APA Format Information). Points will be
deducted if paper and reference page are not in APA format.
Bottom of Form
Copy of the questionnaire used in survey.sav

On the pages that follow, I have included a portion of the actual
questionnaire used to
collect the data included in the survey.sav file. The first page
includes the demographic
questions, followed by the Life Orientation Test (6 items) and
the Positive and Negative
Affect Scale (20 items).
Sample questionnaire:
1. Sex: male (please tick whichever applies)
female
2. Age: _________ (in years)
3. What is your marital status? (please tick whichever applies)
1. single
2. in a steady relationship
3. living with partner
4. married for first time
5. remarried
6. separated
7. divorced
8. widowed
4. Do you have any children currently living at home with you?
(please tick)
yes

no
5. What is the highest level of education that you have
completed? (please tick the
highest level you have completed)
1. primary school
2. some secondary school
3. completed high school
4. some additional training (apprenticeship, TAFE courses etc.)
5. undergraduate university
6. postgraduate university
6. What are the major sources of stress in your life?
_____________________________________________________
________
7. Do you smoke? (please tick)
yes
no
If yes, how many cigarettes do you smoke per week?
____________

Please read through the following statements and decide how
much you either agree
or disagree with each. Using the scale provided write the
number that best indicates
how you feel on the line next to each statement.
strongly disagree 1 2 3 4 5 strongly agree
1. _____ In uncertain times I usually expect the best.
2. _____ If something can go wrong for me it will.
3. _____ I'm always optimistic about my future.
4. _____ I hardly ever expect things to go my way.
5. _____ Overall I expect more good things to happen to me
than bad.
6. _____ I rarely count on good things happening to me.
Source: Scheier, Carver & Bridges, 1994.
This scale consists of a number of words that describe different
feelings and emotions.
For each item indicate to what extent you have felt this way
during the past few weeks.

Write a number from 1 to 5 on the line next to each item.
very slightly or not
at all
1
a little
2
moderately
3
quite a bit
4
extremely
5
1. ______ interested
2. ______ upset
3. ______ scared
4. ______ proud
5. ______ ashamed

6. ______ determined
7. ______ active
8. ______ distressed
9. ______ strong
10. ______ hostile
11. ______ irritable
12. ______ inspired
13. ______ attentive
14. ______ afraid
15. ______ excited
16. ______ guilty
17. ______ enthusiastic
18. ______ alert
19. ______ nervous
20. ______ jittery
Source: Watson, Clark & Tellegen, 1988.

Codebook for survey.sav
Full variable name SPSS variable
name
Coding instructions
Identification number id subject identification number
Sex sex 1 = males; 2 = females
Age age in years
Marital marital 1 = single; 2 = steady relationship; 3 = living
with
a partner; 4 = married for the first time; 5 =
remarried; 6 = separated; 7 = divorced; 8 =
widowed
Children child 1 = yes; 2 = no
Highest level of education educ 1 = primary; 2 = some
secondary;
3 = completed high school;
4 = some additional training;

5 = completed undergraduate;
6 = completed postgraduate.
Major source of stress source 1 = work; 2 = spouse or partner;
3 =
relationships; 4 = children; 5 = family; 6 = health /
illness; 7 = life in general
Do you smoke? smoke 1 = yes; 2 = no
Cigarettes smoked per week smokenum Number of cigarettes
smoked per week
Optimism Scale
op1 to op6 1=strongly disagree , 5=strongly agree
Mastery Scale mast1 to mast7 1=strongly disagree , 4=strongly
agree
PANAS Scale pn1 to pn20 1=very slightly, 5=extremely
Life Satisfaction Scale
lifsat1 to lifsat5 1=strongly disagree , 7=strongly agree
Perceived Stress Scale pss1 to pss10 1=never, 5=very often

Self esteem Scale sest1 to sest10 1=strongly disagree ,
4=strongly agree
Marlowe-Crowne Social
Desirability Scale
m1 to m10 1=true, 2=false
Perceived Control of Internal
States Scale (PCOISS)
pc1 to pc18 1=strongly disagree, 5=strongly agree
Total scale scores included in survey.sav
Full variable name SPSS Variable
name
Coding instructions
Total Optimism Toptim reverse items op2, op4, op6
add all scores op1 to op6
range 6 to 30

Total Mastery Tmast reverse items mast1, mast3, mast4, mast6,
mast7
add all items mast1 to mast7
range 7 to 28
Total Positive affect Tposaff add items pn1, pn4, pn6, pn7, pn9,
pn12, pn13,
pn15, pn17, pn18
range 10 to 50
Total Negative affect Tnegaff add items pn2, pn3, pn5, pn8,
pn10, pn11, pn14,
pn16, pn19, pn20
range 10 to 50
Total Life Satisfaction Tlifesat add all items lifsat1 to lifsat5
range 5 to 35
Total Perceived Stress Tpstress reverse items pss4, pss5, pss7,
pss8
add all items pss1 to pss10
range 10 to 50
Total Self-esteem Tslfest reverse items sest3, sest5, sest7,
sest9, sest10
add all items sest1 to sest10
range 10 to 40

Total Social desirability Tmarlow reverse items m6 to m10
(recode true=1, false
=0)
add all items m1 to m10
range 0 to 10
Total Perceived Control
of Internal States
Tpcoiss reverse items pc1, pc2, pc7, pc11, pc15, pc16
add all items pc1 to pc18
range 18 to 90
New Education
categories
educ2 recoded the categories primary, some secondary
into one group because of small numbers in each
group.
1=primary/some secondary, 2=completed
secondary, 3=some additional training,
4=completed undergraduate university,
5=completed postgraduate university.
Age group 3 categories Agegp3 1=18-29yrs, 2=30-44yrs,
3=45+yrs
Age group 5 categories Agegp5 1=18-24yrs, 2=25-32yrs, 3=33-
40yrs, 4=41-49,
5=50+yrs.

1
Copy of questionnaire for survey5ED.sav
General instructions
In this booklet are a number of scales and questions designed
to measure your opinions,
beliefs and behaviour. Please answer the questions as honestly
as possible, in a way that shows
how you really are, not how you would like to be or how you
think you should be.
You may feel that some questions are very similar to others in
the questionnaire. Each of the
different sets of questions is measuring different aspects so it is
important that you answer each of
the questions. Don’t spend too much time thinking about your
answers. The first answer that pops
into your head is what is needed.
Instructions are given for each of the different sets of
questions. Please read these carefully
as they vary from section to section. Some sets of questions ask
you to give an answer by ticking a
box. Others ask you to rate how much you agree or disagree
using a 4 point scale, others use a 5, 6

or 7 point scale. It is important that you use the correct scale for
each question.
Thank you very much for agreeing to participate in this study.
1. Sex: _____Male _____Female (please tick whichever
applies)
2. Age: ___________ (in years)
3. What is your marital status: (please tick whichever best
describes your current situation)
_____1. single _____2. in a steady relationship _____3. living
with partner _____4. married for
first time
_____5. remarried _____6. separated _____7. divorced
_____8. widowed
4. Do you have any children currently living at home with you:
_____Yes _____No
5. What is the highest level of education that you have
completed: (please tick the highest level you
have completed).
_____ primary school _____ some secondary school _____
completed high school

_____ some additional training
(apprenticeship, TAFE courses etc.) _____ completed
undergraduate University
_____ completed postgraduate University
6. What are the major sources of stress in your life?
_____________________________________________________
____________________________
7. Do you smoke?: _____Yes _____No
If yes, how many cigarettes do you smoke per week
____________
2
Scale A
Please read through the following statements and decide how
much you either agree or disagree with each.
Using the scale provided write the number that best indicates
how you feel on the line next to each statement.

strongly disagree 1 2 3 4 5 strongly agree
______ 1. In uncertain times I usually expect the best.
______ 2. If something can go wrong for me it will.
______ 3. I’m always optimistic about my future.
______ 4. I hardly ever expect things to go my way.
______ 5. Overall I expect more good things to happen to me
than bad.
______ 6. I rarely count on good things happening to me.
Scale B
Please indicate how much you either agree or disagree with each
statement. Write a number from 1 to 4 on
the line next to each statement.
strongly disagree 1 2 3 4 strongly
agree

1. ______ I have little control over the things that happen to me
2. ______ I can do just about anything I really set my mind to
do
3. ______ There is really no way I can solve some of the
problems I have
4. ______ There is little I can do to change many of the
important things in my life
5. ______ What happens to me in the future mostly depends on
me
6. ______ I often feel helpless in dealing with the problems of
life
7. ______ Sometimes I feel that I'm being pushed around in life
3
Scale C
This scale consists of a number of words that describe different
feelings and emotions. For each item indicate
to what extent you have felt this way during the past few weeks.
Write a number from 1 to 5 on the line next to
each item.

very slightly or not
at all
1
a little
2
moderately
3
quite a bit
4
extremely
5
1. ______ interested
2. ______ upset
3. ______ scared
4. ______ proud

5. ______ ashamed
6. ______ determined
7. ______ active
8. ______ distressed
9. ______ strong
10. ______ hostile
11. ______ irritable
12. ______ inspired
13. ______ attentive
14. ______ afraid
15. ______ excited
16. ______ guilty
17. ______ enthusiastic
18. ______ alert
19. ______ nervous
20. ______ jittery

Scale D
Below are five statements with which you may agree or
disagree. Using a 1 to 7 scale, indicate your
agreement with each item by placing the appropriate number on
the line next to that item.
strongly disagree 1 2 3 4 5
6 7 strongly agree
1. ______ In most ways my life is close to ideal
2. ______ The conditions of my life are excellent
3. ______ I am satisfied with my life
4. ______ So far I have got the important things I want in life
5. ______ If I could live my life again, I would change almost
nothing
4
Scale E

Please use the scale below to answer each of the following
questions. Write a number from 1 to 5 in the space
provided.
never
1
almost never
2
sometimes
3
fairly often
4
very often
5
In the last few weeks:
______1. How often have you been upset because of
something that happened unexpectedly?
______2. How often have you felt that you were unable to
control the important things in your life?
______3. How often have you felt nervous and 'stressed’?
______4. How often have you felt confident about your ability
to handle your personal problems?

______5. How often have you felt that things were going your
way?
______6. How often have you found that you could not cope
with all the things that you had to do?
______7. How often have you been able to control irritations
in your life?
______8. How often have you felt that you were on top of
things?
______9. How often have you been angered because of things
that happened that were outside of
your control?
______10. How often have you felt difficulties were piling up
so high that you could not overcome
them?
5
Scale F
Please indicate how much you agree or disagree with each of
these statements using the scale provided
below. Write the number that best indicates how you feel in the

space next to each statement.
strongly disagree 1 2 3 4 strongly agree
1. ______ I feel that I am a person of worth, at least on an
equal basis with others
2. ______ I feel that I have a number of good qualities
3. ______ All in all, I am inclined to feel that I am a failure
4. ______ I am able to do things as well as most other people
5. ______ I feel I do not have much to be proud of
6. ______ I take a positive attitude toward myself
7. ______ I wish I could have more respect for myself
8. ______ On the whole, I am satisfied with myself
9. ______ I certainly feel useless at times
10. ______ At times I think I am no good at all
Scale G
Listed below are a number of statements concerning personal
attitudes and traits. Read each item
and decide whether the statement is true or false as it relates to

you.
Circle either True (T) or False (F) for each statement
T F 1. I’m always willing to admit it when I make a
mistake
T F 2. I always try to practice what I preach
T F 3. I never resent being asked to return a favour
T F 4. I have never been irked when people expressed
ideas very different from my own
T F 5. I have never deliberately said something that hurt
someone’s feelings
T F 6. I like to gossip at times
T F 7. There have been occasions when I took advantage
of someone
T F 8. I sometimes try to get even rather than forgive and
forget
T F 9. At times I have really insisted on having things
my own way
T F 10. There have been occasions when I felt like
smashing things

6
Scale H
Using the scale provided, decide how much you either agree or
disagree with each statement. Next to
each statement, write the number that best indicates how you
feel.
strongly strongly
disagree 1 2 3 4 5 agree
______ 1. I don't have much control over my emotional
reactions to stressful situations.
______ 2. When I'm in a bad mood I find it hard to snap myself
out of it.
______ 3. My feelings are usually fairly stable.
______ 4. I can usually talk myself out of feeling bad.
______ 5. No matter what happens to me in my life I am
confident of my ability to cope
emotionally.
______ 6. I have a number of good techniques that will help me
cope with any stressful situation.

______ 7. I find it hard to stop myself from thinking about my
problems.
______ 8. If I start to worry about something I can usually
distract myself and think about
something nicer.
______ 9. If I realize I am thinking silly thoughts I can usually
stop myself.
______ 10. I am usually able to keep my thoughts under control.
______ 11. I imagine there will be many situations in the future
where silly thoughts will get the
better of me.
______ 12. I have a number of techniques which I am confident
will help me think clearly and
rationally in any situation I might find myself.
______ 13. Even when under pressure I can usually keep calm
and relaxed.
______ 14. I have a number of techniques or tricks that I use to
stay relaxed in stressful situations.
______ 15. When I'm anxious or uptight there does not seem to
be much that I can do to help
myself relax.
______ 16. There is not much I can do to relax when I get

uptight.
______ 17. I have a number of ways of relaxing that I am
confident will help me cope.
______18. If my stress levels get too high I know there are
things I can do to help myself.
You have reached the end of the questionnaire.
Thank you very much for participating in this study.
Your assistance is greatly appreciated

Midterm Exam The purpose of this examination is t

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