Enquiry Letter Supervision and Corporate Real Earnings Management Strategy

Abstract

Abstract: By making use of the enquiry letters disclosed by stock exchanges from 2015 to 2018, this paper investigates the impact of enquiry letter system on the real earnings management behaviors of the listed companies. The existing literatures point out that the enquiry letters in the financial reports can restrict the accrued earnings management of the listed companies, while this study finds out that the listed companies receiving enquiry letters in financial reports can turn to implement real earnings management. Further study finds out that the behavior of implementing real earnings management by the companies receiving the letters would be more significant in the enterprises with severe agency problems; however, it is restricted in the state-owned firms and the firms with higher reputation auditors or with longer listed years. The above study shows that there is still a certain blind spot of supervision in the enquiry letter system in China's securities markets. The conclusion of this paper can provide the theoretical basis and policy reference for regulators to improve their regulatory measures.

Key words: enquiry letter, real earnings management, information disclosure

ZHANG Yan. Enquiry Letter Supervision and Corporate Real Earnings Management Strategy[J]. JOURNAL OF CONTEMPORARY FINANCE AND ECONOMICS, 2020, 0(2): 94-106.

References

[1] Anderson D.M. Taking Stock in China: Company Disclosure and Information in China's Stock Markets[J]. Georgetown Law Journal, 2000, 88(6): 1919-1952.
[2] Ball R., Shivakumar L.Earnings Quality at Initial Public Offerings[J]. Journal of Accounting and Economics, 2008, 45(2-3): 324-349.
[3] Barton J., Simko P.J. The Balance Sheet as an Earnings Management Constraint[J]. The Accounting Review, 2002, 77(1): 1-27.
[4] Bens D.A., Cheng M., Neamtiu M. The Impact of SEC Disclosure Monitoring on the Uncertainty of Fair Value Estimates[J]. The Accounting Review, 2016, 91(2): 349-375.
[5] Beyer A., Cohen D.A.,Lys T. Z. The Financial Reporting Environment: Review of the Recent Literature[J]. Journal of Accounting and Economics, 2010, 50(2- 3): 296-343.
[6] Brown S.V., Tian X., Wu T. J. The Spillover Effect of SEC Comment Letters on Qualitative Corporate Disclosure: Evidence from the Risk Factor Disclosure[J]. Contemporary Accounting Research, 2018, 35(2): 622-656.
[7] Chen Y., Deng Y., Li Z.Can Regulation without Administrative Punishment Improve Audit Quality? -- Evidence based on Inquiry Letters For Financial Reports[J]. Audit Research, 2018, (5): 82-88.
[8] Chen Y., Deng Y., Li Z. Research of Effectiveness of Front-Line Regulation by Stock Exchanges: Evidence based on Inquiry Letters for Financial Reports[J]. Management World,2019, (3): 169-185 + 208.
[9] Cheng Q., Du F., Wang X., Wang Y.Seeing Is Believing: Analysts' Corporate Site Visits[J]. Review of Accounting Studies, 2016, 21(4): 1245-1286.
[10] Cohen D.A., Dey A., Lys T. Z. Real and Accrual- based Earnings Management in the Pre- and Post- Sarbanes- Oxley Periods[J], The Accounting Review, 2008, 83(3): 757-787.
[11] Dong W., Chen J., Chen H.Does Quality of Internal Control Affect Analysts' Behavior? Empirical Evidence from China's Securities Market[J]. Journal of Financial Research, 2017, (12): 191-206.
[12] Erickson M.M., Heitzman S. M., Zhang X. F. Tax-Motivated Loss Shifting[J]. The Accounting Review, 2013, 88(5): 1657-1682.
[13] Gong Q., Wu L., Wang Y. Partial Substitution between Two Types of Earnings Management[J]. Economic Research Journal,2015, (6): 175-188+192.
[14] Graham J.R., Harvey C. R., Rajgopal S. The Economic Implications of Corporate Financial Reporting[J]. Journal of Accounting and Economics, 2005, 40(1-3): 3-73.
[15] Healy P.M., Palepu K. G. Information Asymmetry, Corporate Disclosure and the Capital Markets: A Review of the Empirical Disclosure Literature[J]. Journal of Accounting and Economics, 2001, 31(1): 405-440.
[16] Kothari S.P., Leone A. J., Wasley C. E. Performance Matched Discretionary Accrual Measures[J]. Journal of Accounting and Economics, 2005, 39(1): 163-197.
[17] Kubick T.R., Lynch D. P., Mayberry M. A. The Effects of Regulatory Scrutiny on Tax Avoidance: An Examination of SEC Comment Letters[J]. The Accounting Review, 2016, 91(6): 1751-1780.
[18] Leuz C., Wysocki P.D. The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research[J]. Journal of Accounting Research, 2016, 54(2): 525-622.
[19] Li X., Yang G., Rao P.Do Inquiry letters from Stock Exchanges for Annual Reports Play a Regulatory Role? -- Text Analysis based on M&A and Reorganization Reports[J]. Economic Research Journal, 2019, (5): 181-198.
[20] Roychowdhury S.Earnings Management through Real Activities Manipulation[J]. Journal of Accounting and Economics, 2006, 42(3): 335-370.
[21] Wang Q.Determinants of Segment Disclosure Deficiencies and Effect of the SEC Comment Letter Process[J]. Journal of Accounting and Public Policy, 2016, 35(2): 109-133.
[22] Wei Z., Wu Y., Li C. Family Control,Dual Principal-Agent Conflict and Cash Dividend Policy: An Empirical Study based on Chinese Listed Companies[J]. Journal of Financial Research, 2012, (7): 168-181.
[23] Zang A.Y. Evidence on the Trade-off between Real Activities Manipulation and Accrual-based Earnings Management[J]. The Accounting Review, 2012, 87(2): 675-703.
[24] Zhang J., Tang X., Li G.Can Preventive Regulation Inhibit Risk of Stock Price Crash? A Study based on Inquiry letters from Stock Exchanges for Annual Reports[J]. Journal of Management Sciences in China, 2018, (10): 112-126.
[25] Zhai S., Wang M.Has Regulation without Administrative Punishment Improved Quality of Company Performance Forecast -- Evidence from Inquiry Letters for Financial Reports[J]. Journal of Shanxi University of Finance and Economics, 2019, (4): 92-107.