Earnings Management, Asset Restructuring, and the Threat of Exchange Delisting in an Earnings-based Regulatory Regime
Article first published online: 14 SEP 2010
© 2010 Blackwell Publishing Ltd
Corporate Governance: An International Review
Volume 18, Issue 5, pages 438–456, September 2010
How to Cite
Cheng, P., Aerts, W. and Jorissen, A. (2010), Earnings Management, Asset Restructuring, and the Threat of Exchange Delisting in an Earnings-based Regulatory Regime. Corporate Governance: An International Review, 18: 438–456. doi: 10.1111/j.1467-8683.2009.00780.x
- Issue published online: 14 SEP 2010
- Article first published online: 14 SEP 2010
- Corporate Governance;
- Earnings Management;
- Asset Restructuring;
- Earnings-based Delisting Regulation;
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.