Earnings Management and the Effect of Earnings Quality in Relation to Stress Level and Bankruptcy Level of Chinese Listed Firms

This paper investigates the link between earnings management and earnings quality for the Chinese firms listed in the Shanghai and Shenzhen stock exchanges from 2003 to 2007. The earnings quality is measured by four separate earnings attributes: accruals quality, earnings persistence, earnings predictability, and earnings smoothness. We find that the stressed/bankrupt firms prefer opportunistic earnings management; the nonstressed/non-bankrupt firms are more likely to choose more efficient earnings management than the stressed/non-bankrupt firms. We find that earnings management performs better than earnings quality in predicting future profitability. We also find that the earnings quality has deteriorated over the sample period; the number of stressed/bankrupt firms increased and the number of non-stressed/non-bankrupt firms decreased