The impact of XBRL on real earnings management: unexpected consequences of the XBRL implementation in China

Abstract

In this paper, we investigate whether there is a change of real earnings management for firms facing pressures of the new technology implementation of eXtensible Business Reporting Language (XBRL). We find that real earnings management increases after the implementation of XBRL in China, especially under the dual regulation of XBRL policies from two regulators (China Securities Regulation Committee and Ministry of Finance). Given the long term detrimental effect of real earnings management on firm value, this could be unexpected consequences of XBRL technology in emerging market. Furthermore, state-owned enterprises and non-state-owned enterprises behave differently under the dual regulation of XBRL policies.

This is a preview of subscription content, access via your institution.

Availability of data and material

All the financial data in this paper are obtained from the CSMAR database.

Notes

  1. 1.

    We define suspect firms that are likely to manipulate earnings based on three benchmarks following Roychowdhury (2006), Zang (2012) and Doukakis (2014): loss avoidance, seasoned equity offering and slight earnings growth (meeting/beating last year's earnings).

  2. 2.

    China Securities Regulation Committee (CSRC) has begun to implement XBRL since 2004, while Ministry of Finance (MOF) has also enforced its own XBRL regulation since 2010.

  3. 3.

    The China Securities Regulation Committee (CSRC) and the Ministry of Finance (MOF) are two parallel subordinate units under the State Council. CSRC is responsible for overseeing the financial market, including the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE), and keeping the financial market operating regularly. MOF establishes and amends accounting standards and related regulations.

  4. 4.

    The twelve accounting firms include Big Four (KPMG, Ernst & Young (EY), Deloitte and PricewaterhouseCoopers (PwC)) and eight other big local accounting firms such as WUYIGE, Crowe Horwath, Pan-China, Grant Thornton, Shu Lun Pan, ShineWing, RSM China, and Da Hua (see Appendix 1).

  5. 5.

    In 1998, Hoffman initiated the idea of using XML (eXtensible Markup Language) in financial information disclosures, constructed the framework and designed XFRML (eXtensible Financial Reporting Markup Language). AICPA invested in Hoffman’s project in 1999 and officially renamed XFRML as XBRL(Hoffman et al. 1999).

  6. 6.

    According to Roychowdhury (2006), normal CFO is a linear function of sales and change in sales, and the abnormal cash flow from operations (R_CFO) is the residual from the function. Discretionary expenses are a function of lagged sales, and the abnormal discretionary expense (R_DISC) is the residual from the regression model. Production costs are defined as the sum of COGS and change in inventory during the year. We model production costs as a linear function of contemporaneous sales, change in sales and change in lagged sales, and then abnormal production cost (R_PRODC) is the residual from this model. Following the CSRC’s industry classification scheme, we use the one-digit code for the sectors and require at least 10 observations in an industry-year to estimate each regression and estimate the abnormal level of each component in REM. If a firm wants to manipulate earnings upward, it will choose to adopt a loose credit policy to boost revenue but decrease cash flow, manipulate various expenses downward or increase the production level to share the fixed cost so as to reduce unit cost.

  7. 7.

    The major advantage of a one-group pre- and post-test design is that it allows us to use adopters as their own control group to evaluate post-adoption effects. This design is commonly used when the majority of publicly traded companies undergo an event (e.g., ERP adoption, SOX Sect. 404 compliance), making a matched-pair design less effective (Bathala and Carlson 1995).

  8. 8.

    We have the 1st year available financial data starting from 1998 in CSMAR database. Our other control variables start from 1999, because we use change analysis to calculate abnormal discretionary accruals following Dechow and Dichev model.

  9. 9.

    There are several differences between CSRC and MOF XBRL standards and disclosure: (1) language of element name and label link base, (2) specification edition, and (3) platform type-in and unique submission software. For details, please refer to Appendix 2.

  10. 10.

    From China Accounting News, 2015-05-09 http://mp.weixin.qq.com/s?__biz=MzA3MzI1NDkyOA==&mid=2651966575&idx=3&sn=1e85da92cc32c5fd74d46886dc57d38e&scene=1&srcid=05095sI1OnDe4h5qYkTh4sCV&from=singlemessage&isappinstalled=0#wechat_redirect.

  11. 11.

    For detailed information on the XBRL implementing process of MOF, please refer to Appendix 3.

  12. 12.

    SURE can combine the estimation results (parameter estimates and associated (co)variance matrices) and store under namelist into one parameter vector and simultaneous (co)variance matrix of the sandwich/robust type. Typical applications of SURE is to test whether coefficients vary between groups.

References

  1. Abad D, Cutillas-Gomariz MF, Sánchez-Ballesta JP, Yagüe J (2018) Real earnings management and information asymmetry in the equity market. Eur Account Rev 27:209–235. https://doi.org/10.1080/09638180.2016.1261720

    Article  Google Scholar 

  2. Bai C, Li DD, Tao Z, Wang Y (2000) A multitask theory of state enterprise reform. J Comp Econ 28:716–738. https://doi.org/10.1006/jcec.2000.1681

    Article  Google Scholar 

  3. Bai C, Lu J, Tao Z (2006) The multitask theory of state enterprise reform: empirical evidence from China. Am Econ Rev 96:353–357. https://doi.org/10.1257/000282806777212125

    Article  Google Scholar 

  4. Baker TA, Lopez TJ, Reitenga AL, Ruch GW (2019) The influence of CEO and CFO power on accruals and real earnings management. Rev Quant Financ Account 52:325–345. https://doi.org/10.1007/s11156-018-0711-z

    Article  Google Scholar 

  5. Bathala C, Carlson S (1995) The 1986 Tax Reform Act and strategic leverage decisions. J Financ Strateg Decis 8:57–63

    Google Scholar 

  6. Bereskin FL, Hsu P-H, Rotenberg W (2018) The real effects of real earnings management: evidence from innovation. Contemp Account Res 35:525–557. https://doi.org/10.1111/1911-3846.12376

    Article  Google Scholar 

  7. Bhattacharya N, Cho YJ, Kim JB (2018) Leveling the playing field between large and small institutions: evidence from the SEC’s XBRL mandate. Account Rev 93:51–71. https://doi.org/10.2308/accr-52000

    Article  Google Scholar 

  8. Cai Y, Kim Y, Li S, Pan C (2019) Tone at the top: CEOs’ religious beliefs and earnings management. J Bank Financ 106:195–213. https://doi.org/10.1016/j.jbankfin.2019.06.002

    Article  Google Scholar 

  9. Cai G, Li W, Tang Z (2020) Religion and the method of earnings management: evidence from China. J Bus Ethics 161:1–20. https://doi.org/10.1007/s10551-018-3971-6

    Article  Google Scholar 

  10. Chan LH, Chen KCW, Chen T, Yu Y (2015) Substitution between real and accruals-based earnings management after voluntary adoption of compensation clawback provisions. Account Rev 90:147–174. https://doi.org/10.2308/accr-50862

    Article  Google Scholar 

  11. Chen H, Chen JZ, Lobo GJ, Wang Y (2011) Effects of audit quality on earnings management and cost of equity capital: evidence from China. Contemp Account Res 28:892–925. https://doi.org/10.1111/j.1911-3846.2011.01088.x

    Article  Google Scholar 

  12. Chen S, Harris LL, Li W, Wu D (2015a) How does XBRL affect the cost of equity capital? Evidence from an emerging market. J Int Account Res 14:123–145. https://doi.org/10.2308/jiar-51211

    Article  Google Scholar 

  13. Chen Y-C, Lee C-H, Chou P-I (2015b) Stock-based compensation and earnings management behaviors. Rev Pacific Basin Financ Mark Policies 18:1–33. https://doi.org/10.1142/S0219091515500083

    Article  Google Scholar 

  14. Chen S, Guo J, Tong X (2017) XBRL implementation and post-earnings-announcement drift: the impact of state ownership in China. J Inf Syst 31:1–19. https://doi.org/10.2308/isys-51374

    Article  Google Scholar 

  15. Cheng Q, Lee J, Shevlin T (2016) Internal governance and real earnings management. Account Rev 91:1051–1085. https://doi.org/10.2308/accr-51275

    Article  Google Scholar 

  16. Cohen DA, Zarowin P (2010) Accrual-based and real earnings management activities around seasoned equity offerings. J Account Econ 50:2–19. https://doi.org/10.1016/j.jacceco.2010.01.002

    Article  Google Scholar 

  17. Cohen DA, Dey A, Lys TZ (2008) Real and accrual-based earnings management in the pre- and post-Sarbanes Oxley periods. Account Rev 83:757–787. https://doi.org/10.2308/accr.2008.83.3.757

    Article  Google Scholar 

  18. Cooper LA, Downes JF, Rao RP (2018) Short term real earnings management prior to stock repurchases. Rev Quant Financ Account 50:95–128. https://doi.org/10.1007/s11156-017-0624-2

    Article  Google Scholar 

  19. De Andres J, Lorca P, Martinez AB (2010) Factors influencing web accessibility of big listed firms: an international study. Online Inf Rev 34:75–97. https://doi.org/10.1108/14684521011024137

    Article  Google Scholar 

  20. Dechow PM, Dichev ID (2002) The quality of accruals and earnings: the role of accrual estimation errors. Account Rev 77:35–59. https://doi.org/10.2308/accr.2002.77.s-1.35

    Article  Google Scholar 

  21. Degeorge F, Patel J, Zeckhauser RJ (1999) Earnings management to exceed thresholds. J Bus 72:1–33. https://doi.org/10.1086/209601

    Article  Google Scholar 

  22. Dong Y, Li OZ, Lin Y, Ni C (2016) Does information-processing cost affect firm-specific information acquisition? Evidence from XBRL adoption. J Financ Quant Anal 51:435–462. https://doi.org/10.1017/S0022109016000235

    Article  Google Scholar 

  23. Doukakis LC (2014) The effect of mandatory IFRS adoption on real and accrual-based earnings management activities. J Account Public Policy 33:551–572. https://doi.org/10.1016/j.jaccpubpol.2014.08.006

    Article  Google Scholar 

  24. Du M, Boateng A, Newton D (2016) The impact of state ownership, formal institutions and resource seeking on acquirers’ returns of Chinese M&A. Rev Quant Financ Account 47:159–178. https://doi.org/10.1007/s11156-015-0498-0

    Article  Google Scholar 

  25. Dunne T, Helliar C, Lymer A, Mousa R (2013) Stakeholder engagement in internet financial reporting: the diffusion of XBRL in the UK. Br Account Rev 45:167–182. https://doi.org/10.1016/j.bar.2013.06.012

    Article  Google Scholar 

  26. Einhorn E, Langberg N, Versano T (2018) Cross-firm real earnings management. J Account Res 56:883–911. https://doi.org/10.1111/1475-679X.12188

    Article  Google Scholar 

  27. Eng LL, Tian X, Robert YuT (2018) Financial statement analysis: evidence from Chinese firms. Rev Pacific Basin Financ Mark Policies 21:1–32. https://doi.org/10.1142/S0219091518500273

    Article  Google Scholar 

  28. Ewert R, Wagenhofer A (2005) Economic effects of tightening accounting standards to restrict earnings management. Account Rev A Q J Am Account Assoc 80:1101–1124. https://doi.org/10.2308/accr.2005.80.4.1101

    Article  Google Scholar 

  29. Felo AJ, Kim JW, Lim J-H (2018) Can XBRL detailed tagging of footnotes improve financial analysts’ information environment? Int J Account Inf Syst 28:45–58. https://doi.org/10.1016/j.accinf.2017.12.003

    Article  Google Scholar 

  30. Francis BB, Hasan I, Li L (2016) Abnormal real operations, real earnings management, and subsequent crashes in stock prices. Rev Quant Financ Account 46:217–260. https://doi.org/10.1007/s11156-014-0468-y

    Article  Google Scholar 

  31. Gao J, Gao B, Wang X (2017) Trade-off between real activities earnings management and accrual-based manipulation-evidence from China. J Int Accounting, Audit Tax 29:66–80. https://doi.org/10.1016/j.intaccaudtax.2017.08.001

    Article  Google Scholar 

  32. Ge W, Kim J-B (2014) Boards, takeover protection, and real earnings management. Rev Quant Financ Account 43:651–682. https://doi.org/10.1007/s11156-013-0388-2

    Article  Google Scholar 

  33. Guo J, Huang P, Zhang Y, Zhou N (2015) Foreign ownership and real earnings management: evidence from Japan. J Int Account Res 14:185–213. https://doi.org/10.2308/jiar-51274

    Article  Google Scholar 

  34. Hodge FD, Kennedy J, Maines LA (2004) Does search-facilitating technology improve the transparency of financial reporting? Account Rev 79:687–703. https://doi.org/10.2308/accr.2004.79.3.687

    Article  Google Scholar 

  35. Hoffman C, Rodriguez MM (2013) Digitizing financial reports—issues and insights: a viewpoint. Int J Digit Account Res 13:73–98. https://doi.org/10.4192/1577-8517-v13_3

    Article  Google Scholar 

  36. Hoffman C, Kurt C, Koreto RJ (1999) The XML files. J Account 187:71–77

    Google Scholar 

  37. Huang S, Roychowdhury S, Sletten E (2020) Does litigation deter or encourage real earnings management? Account Rev (forthcoming). https://doi.org/10.2308/accr-52589

    Article  Google Scholar 

  38. Kaya D, Pronobis P (2016) The benefits of structured data across the information supply chain: initial evidence on XBRL adoption and loan contracting of private firms. J Account Public Policy 35:417–436. https://doi.org/10.1016/j.jaccpubpol.2016.04.003

    Article  Google Scholar 

  39. Kim JW, Lim J, No WG (2012) The effect of first wave mandatory XBRL reporting across the financial information environment. J Inf Syst 26:127–153. https://doi.org/10.2308/isys-10260

    Article  Google Scholar 

  40. Kim J-B, Kim JW, Lim J-H (2019) Does XBRL adoption constrain earnings management? Early evidence from mandated U.S. filers. Contemp Account Res 36:2610–2634. https://doi.org/10.1111/1911-3846.12493

    Article  Google Scholar 

  41. Li Y, Roge J, Crews M (2006) Information technology addresses transparency: the potential effects of XBRL on financial disclosure. Issues Inf Syst 7:241–245. https://doi.org/10.1002/0470094192.ch6

    Article  Google Scholar 

  42. Liu Q, Lu Z (2007) Corporate governance and earnings management in the Chinese listed companies: a tunneling perspective. J Corp Financ 13:881–906. https://doi.org/10.1016/j.jcorpfin.2007.07.003

    Article  Google Scholar 

  43. Liu C, Wang T, Yao LJ (2014) XBRL’s impact on analyst forecast behavior: an empirical study. J Account Public Policy 33:69–82. https://doi.org/10.1016/j.jaccpubpol.2013.10.004

    Article  Google Scholar 

  44. Liu C, Luo X, Wang FL (2017) An empirical investigation on the impact of XBRL adoption on information asymmetry: evidence from Europe. Decis Support Syst 93:42–50. https://doi.org/10.1016/j.dss.2016.09.004

    Article  Google Scholar 

  45. Lo K (2008) Earnings management and earnings quality. J Account Econ 45:350–357. https://doi.org/10.1016/j.jacceco.2007.08.002

    Article  Google Scholar 

  46. Pathak J (2013) Extensible business reporting language XBRL: potential of research in XBRL as a social artifact-An essay. Int J Enterp Inf Syst 9:99–102. https://doi.org/10.4018/ijeis.2013100107

    Article  Google Scholar 

  47. Peng EY, Shon J, Tan CEL (2011) XBRL and accruals: empirical evidence from China. Account Perspect 10:109–138. https://doi.org/10.1111/j.1911-3838.2011.00021.x

    Article  Google Scholar 

  48. Roychowdhury S (2006) Earnings management through real activities manipulation. J Account Econ 42:335–370. https://doi.org/10.1016/j.jacceco.2006.01.002

    Article  Google Scholar 

  49. Watts RL, Zimmerman JL (1978) Towards a positive theory of the determination of accounting standards. Account Rev 53:112–134

    Google Scholar 

  50. Yoon H, Zo H, Ciganek AP (2011) Does XBRL adoption reduce information asymmetry. J Bus Res 64:157–163. https://doi.org/10.1016/j.jbusres.2010.01.008

    Article  Google Scholar 

  51. Zang AY (2012) Evidence on the trade-off between real activities manipulation and accrual-based earnings management. Account Rev 87:675–703. https://doi.org/10.2308/accr-10196

    Article  Google Scholar 

  52. Zhang Y, Guan Y, Kim J-B (2019) XBRL adoption and expected crash risk. J Account Public Policy 38:31–52. https://doi.org/10.1016/j.jaccpubpol.2019.01.003

    Article  Google Scholar 

Download references

Funding

We gratefully acknowledge the funding provided by the National Natural Science Foundation of China (NSFC-71672009, 71972011) and Rutgers School of Business Camden summer research grant.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Songsheng Chen.

Ethics declarations

Conflicts of interest

All the authors acknowledge that there is no conflict of interest to influence the work.

Code availability

We use Stata as the software to conduct the data processing and empirical tests in this paper.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix 1: Big12 accounting firms designated by MOF

No. Name of accounting firms
1 Shu Lun Pan Certified Public Accountants Co., LTD
2 Pan-China Certified Public Accountants Co., LTD
3 Da Hua Certified Public Accountants Co., LTD
4 ShineWing Certified Public Accountants Co., LTD
5 Crowe Horwath China Certified Public Accountants Co., LTD
6 Grant Thornton China Certified Public Accountants Co., LTD
7 RSM China Certified Public Accountants Co., LTD
8 WUYIGE Certified Public Accountants Co., LTD
9 PwC China Certified Public Accountants Co., LTD
10 Deloitte China Certified Public Accountants Co., LTD
11 KPMG China Certified Public Accountants Co., LTD
12 Ernst & Young China Certified Public Accountants Co., LTD
  1. The accounting firms reported in this table were designated by MOF to assist their listed clients to prepare XBRL instances based on the XBRL taxonomy established by MOF in 2010. Some of the domestic accounting firms are named after the firm founder, such as Shu Lun Pan and Wu Yige while some are named after the international head office, such as Grant Thornton China and RSM China. Crowe Horwath China and RSM China were merged as Rui Hua Certified Public Accountants Co., LTD in 2013

Appendix 2: The XBRL implementation steps of MOF regulations

Act No. Date Fiscal Year XBRL implementation steps
MOF[2010]No.23 2010/12/9 2010 1. The first batch of enterprises: thirteen central SOEs implement XBRL under the direct supervision of MOF and receive professional technical support.
2. Big 12 accounting firms (see Appendix A) receive professional software and begin assisting all of their clients in submitting XBRL instances through CPA management system.
[Starting from fiscal year ending December 31, 2010]
MOF[2012]No.4 2012/2/28 2011 The second batch of local SOEs from 14 provinces implement XBRL. Each province selects at least 5 local SOEs under the supervision of the local financial department. Each local financial department collects XBRL instances and submits them to MOF.
[Starting from fiscal year ending December 31, 2011]
MOF[2012]No.10 2012/5/7 2011 XBRL implementation for central SOEs is extended to include China National Offshore Oil Corporation and China Mobile Communications Corporation.
[Starting from fiscal year ending December 31, 2011]
MOF[2013]No.4 2013/3/20 2012 The third batch of local SOEs from the rest 16 provinces implement XBRL. Each province selects at least 3 local SOEs under the supervision of the local financial department. Each local financial department collects XBRL instances and submits them to MOF.
[Starting from fiscal year ending December 31, 2012]
  1. Eighteen commercial banks and five insurance companies are required to implement XBRL (MOF [2012] No. 7). Their information is not reported in the table, since our paper focuses on non-financial industries

Appendix 3: The difference betweeen CSRC and MOF XBRL taxonomy and submission

Item China Securities Regulation Committee (CSRC) Ministry of Finance (MOF)
Namespace Non-open space Open space, http://XBRL.mof.gov.cn
Language of Element Name/Label Linkbase Chinese, Pinyin and English
e.g.
xml:lang = ”en” xlink:type = ”resource” xlink:label = ”clcid-pt_ZiChanFuZhaiBiao_lbl” > Balance Sheet </label>
<!–17: 流动资产合计– > <element name = ”LiuDongZiChanHeJi” type = ”XBRLi:monetaryItemType” substitutionGroup = ”XBRLi:item” nillable = ”true” id = ”clcid-pt_LiuDongZiChanHeJi” XBRLi:periodType = ”instant”/>
Chinese and English
e.g.
xml:lang = ”zh” xlink:type = ”resource” xlink:label = ”label_AccountingTreatmentOfBusinessPurchased” id = ”label_AccountingTreatmentOfBusinessPurchased” > 分入业务的处理 </link:label>
xml:lang = ”en” xlink:type = ”resource” xlink:label = ”label_AccountsPayablesRatioOfTotalAccountsPayable
Edition XBRL 2.1 Edition (Submitted to XBRL International)
Some papers point out that the edition actually used by SSE is different from what it disclosed and submitted to XBRL International.
XBRL 2.1 Edition
Submission Both SSE and SZSE have their own platforms for listed firms to extract and input key information to generate XBRL instances. However, the XBRL instances are unavailable for firms and individual investors; they are disclosed to the public only as visual charts and tables. Big12 clients are provided with unique software designed by MOF.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Chen, S., Guo, J., Liu, Q. et al. The impact of XBRL on real earnings management: unexpected consequences of the XBRL implementation in China. Rev Quant Finan Acc 56, 479–504 (2021). https://doi.org/10.1007/s11156-020-00900-1

Download citation

Keywords

  • XBRL
  • Real earnings management
  • Technology
  • Risk aversion

JEL Classification

  • M41
  • M48