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A Review of Earnings Management in China and its Implications

This paper reviews the academic literature on earnings management in China. We discuss the motivations behind the listed firms’ earnings management, and provide empirical evidence on earnings management using various accounting measures. The literature shows that earnings management occurs most often before security issuance, or when a firm is facing the risk of delisting. While non-core income was widely used to measure earnings management in China, as it is easily detected, researchers are now focusing their attentions on accrual-based models. We then explore the real causes of earnings management in China, and conclude that the two main causes are the concentrated ownership structure, and the strong political and economic connections between government and the listed companies. We review the impact of corporate governance mechanisms and government supervision on earnings management in China. Finally, we discuss implications for the regulators and make suggestions for future research.