Article2010

Earnings Management, Asset Restructuring, and the Threat of Exchange Delisting in an Earnings‐based Regulatory Regime

Cheng Peng · Walter Aerts · Ann Jorissen

56 citations0/0 files storedCorporate Governance An International Review

No readable copy stored yet — this record is metadata only.

Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/Issue: This study examines the effect of an earnings‐based listing regulation on corporate financial reporting management. In 2001, China revised its listing standards requiring compulsory stock suspension for firms reporting three‐year consecutive losses. Suspended stocks are further delisted if they continue to report losses in the year of stock suspension. Research Findings/Insights: Our results show that firms approaching the delisting procedure use more earnings management, although the effect is minor. Meanwhile, we observe that delisting risk induces extensive performance‐enhancing asset restructuring activities. For firms turning losses into profits, our evidence suggests a negative relationship between earnings management and asset restructuring. Theoretical/Academic Implications: This study extends the earnings management literature by suggesting that earnings management to avoid losses is likely to increase with the severity of the losses and decline with asset restructuring activities. In addition, this research adds to the literature on the economic consequences of the delisting process. Practitioner/Policy Implications: The study provides evidence that an earnings‐based delisting regulation is a double‐edged sword which leads to either earnings management or performance‐enhancing asset restructuring activities. By pointing out the earnings management and restructuring effects of the Chinese delisting regime, we may inform policy makers of the economic consequences of an earnings‐based regime. This adds to prior evidence on the effects of market‐based delisting thresholds. In addition, the study highlights that the earnings‐based delisting regulation does not create a level playing field, since state‐controlled firms are at an advantage to use more government‐led asset restructurings through state‐owned shareholders in order to avoid delisting.

Citations in this library

Stored only when both papers are in the corpus — 56 citations exist upstream.

References

2005Performance matched discretionary accrual measures 2003Earnings Management through Real Activities Manipulation 2003Earnings management and investor protection: an international comparison 2002Audit committee, board of director characteristics, and earnings management 1997Earnings management to avoid earnings decreases and losses 2008Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods 1992Liquidation Values and Debt Capacity: A Market Equilibrium Approach 1994Debt covenant violation and manipulation of accruals

Cited by

2017Political Connections and Government Subsidies: Evidence from Financially Distressed Firms in China 2022Fostering firm productivity through green finance: Evidence from a quasi-natural experiment in China 2022Dividend policy and earnings management: Do agency problem and financing constraints matter?2018The use of accounting anomalies indicators to predict business failure 2013Management's Earnings Justification and Earnings Management under Different Institutional Regimes 2021

Imported from OpenAlex (CC0) — nothing here is generated.