Earnings management and firms’ investment behavior: The threshold effect of ROE

Title

Earnings management and firms’ investment behavior: The threshold effect of ROE

Description

This paper, on the basis of a sample of Chinese listed firms, investigates the relationship between both real and accrual-based earnings management activities and firms' capital investment behavior. We apply the threshold model proposed by Hansen (1999) and find firms managing earnings can either over or underinvest, depending upon firms' return on equity (ROE) level. The study results show an inverted relationship between earnings management and firms' investment, which changes from negative to positive with ROE rising beyond certain threshold levels. We also find that the level of ROE affects whether managers use real and accrual manipulations jointly or as substitutes in affecting firms' investment. Our evidence is important because it sheds new light on the relationship between earnings management activities and firms' investment behavior by showing that ROE may act as an important determinant in this relationship. This finding has important implications for policymakers such as the Chinese Securities Regulatory Commission (CSRC) as it shows that the regulatory benchmarks they set may have a significant impact on firms' investment behavior.

Fresno State author

Shu Lin

College or School

Craig School of Business

Department

Accountancy

Format

article

Full text

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Citation Info

Liu, S., Lin, S., Sun, Z., & Yuan, L. (2021). Earnings management and firms’ investment behavior: The threshold effect of ROE. Emerging Markets Review, 47, 100797. https://doi.org/10.1016/j.ememar.2021.100797

UN Sustainable Development Goal

Decent Work and Economic Growth

Files

Earnings management and firms’ investment behavior

Citation

“Earnings management and firms’ investment behavior: The threshold effect of ROE,” Outstanding Faculty Publications, accessed May 5, 2024, https://facpub.library.fresnostate.edu/items/show/330.