【Abstract】

This paper investigates the consequences of earnings management triggered by earningsbased delisting regulations in China. Our main finding is that there is a positive relationship between earnings management to avoid delisting by firms subject to delisting regulations and the subsequent performance, measured by operating performance and recurrence of losses. The results are robust to the various performance measures, including gross margin, assets turnover, and probability of bankruptcy, indicating that performance improvement is supported by fundamentals. Although previous literature documents that firms subject to delisting opportunistically manage their earnings to circumvent regulations, the implementation of earnings management in the context of delisting regulations is in the best interest of shareholders. We confirm this argument by showing positive market consequences of earnings management induced by delisting regulations.

【Authors】

Qiu Zhigang, Senior Research Fellow of IMI, School of Finance, Renmin University of China

Zhang Xiaodong, School of Accounting, Dongbei University of Finance and Economics