Research on the Influence of Diversification of Chinese Listed Companies on Earnings Management

[Purpose]Since the 1980s, the Chinese stock market has developed rapidly, becoming one of the main channels for allocation of social resources. Financial statements of listed companies, particularly income information, are the focus of investors, managers, creditors and governments. In response, this study focused on this income information, especially focusing on the impact of diversification on earnings management. [Methodology]To this end, earnings managements were measured separately as discretionary accrual earnings management and real earnings management, respectively：Specifically, discretionary accrual earnings management was measured with the modified Jones model of Dechow et al.(1995), and real earnings management was measured respectively using Roychowdhury et al.(2006). These measures were utilized to empirically verify the effect of diversifying Chinese companies on earnings management. [Findings]The results of this study are as follows. First, diversification of Chinese companies has been shown to have a negative (－) relevance to real earnings management as well as discretionary accrual earnings management. In other words, the more diversified the company, the lower the level of earnings management. Second, the relevance between diversification and earnings management of Chinese companies was differentiated according to whether they were state－owned companies, management influence, and equity balances. [Implications]This study contributes to the study in that various stakeholders in the Chinese capital market can provide one useful information in decision－making by analyzing the impact of diversification on earnings management under China’s unique economic system background and market conditions.