Accrued Earnings Management on the Enterprises of National Equities Exchange and Quotations in China
Tai-Chen Shih/Department of Accounting Fu Jen Catholic University
Lih-Wen Tsai/Department of Accounting Fu Jen Catholic University
Abstract
In China, National Equities Exchange and Quotations (NEEQ) launched a tiered system in 2016, classifying the NEEQ into two tiers: innovation and basic. We collected 14,038 firm-year observations of NEEQ-listed enterprises between 2016 and 2017 to investigate the correlation between the tiered system in the NEEQ and discretionary accruals management. According to the empirical findings, the enterprises listed in the innovation tier, particularly those that were upgraded, would be more likely to carry out discretionary accruals management. With regard to the motivation and magnitude of discretionary accruals management, we find that the enterprises who enter the innovation tier are motivated to window-dress their financial statements via discretionary accruals management so as to prevent being downgraded from the innovation tier. However, for enterprises that have remained at the innovation tier for two successive years, the objective of discretionary accruals management is to not only smooth their income but also camouflage above-expectation profits, thereby attenuating the pressure to remain in the innovation tier. Finally, we do not observe that the enterprises downgraded from the innovation tier into the basic tier were motivated to take a big bath during the year of a sharp decline in financial performance to lower their future corporate tax payments by carrying forward net operating loss and creating opportunities to return to the innovation tier.
Keywords
Earnings management, National equities exchange and quotations (NEEQ), Innovation layer, Basic Layer.
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