Real and Accrual-Based Earnings Management in the Pre- and Post-IFRS Periods: Evidence from China

• In Event: SESSION 5C: IFRS Issues

Abstract

The purpose of this paper is to investigate the changes in earnings management behavior for Chinese A-share firms surrounding the adoption of substantially IFRS-convergent accounting standards. Beginning in 1992, China has implemented a series of accounting regulations with the goal of improving the quality of publically available financial statements. The most recent reform occurred in 2006, which requires that, effective in January 2007, all listed A-share firms follow a new set of accounting standards that have substantially conformed to International Financial Reporting Standards (IFRS). Based on a sample of 4,050 firm-year observations from 2002 to 2011, we find that Chinese firms in the post-IFRS period (2007-2011) are less likely to engage in accrual-based earnings management but are more likely to engage in real earnings management. Overall, our evidence suggests that managers in Chinese firms turn to real earnings management as a substitute mechanism to achieve earnings benchmarks when their ability to manipulate accruals upward is constrained after the adoption of substantially IFRS-convergent accounting standards.

Authors

• Li-Chin Jennifer Ho, University of Texas-Arlington

• Qunfeng Liao, The University of Texas at Arlington

• Martin Edward Taylor, University of Texas-Arlington