Journal of International Accounting Research Editor's Report

Abstract

To offer evidence on this issue, we take advantage of the regulatory environment in the Chinese setting. In China, regulators have created a bright line at which firms must disclose within 30 days after the fiscal year end expected changes in net income of 50% or greater. Consistent with earnings management to avoid reporting earnings that miss this explicit regulation-generated benchmark, we find far more firms than would be expected just beat the −50% threshold (i.e., there is a distinct “kink” in the earnings change distribution at −50%). As further evidence of earnings management, firms just beating the −50% threshold have higher abnormal accruals and excess non-operating income. The ability of firms to avoid missing the −50% regulatory benchmark, however, is reduced for those with stronger monitoring (foreign investors, exchange regulators, and IFRS). We find no evidence of earnings management at the regulatory threshold of +50% change in net income. Overall, our study sheds light on firms’ opportunistic reporting behavior to suppress bad news related to a regulatory benchmark and on the monitoring mechanisms associated with such behavior. Keywords: