Forecasting the level of earnings management of Russian and Chinese companies

• Main Authors: Anna Loukianova, Egor Nikulin, Andrey Zinchenko
• Format: Article
• Language: English
• Published: LLC "CPC "Business Perspectives" 2017-07-01
• Series: Investment Management & Financial Innovations
• Subjects: China; decision tree; earnings management; forecasting; Russia
• Online Access: https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/8970/imfi_2017_02cont_Loukianova.pdf
• ISSN: 1810-4967; 1812-9358

The purpose of the current paper is to elaborate a model to forecast a particular type of earnings management by companies: upward earnings management, downward earnings management or the absence of significant manipulation. The sample analyzed in the current paper comprises 664 Russian and 2,380 Chinese public companies for the period 2009-2014. The forecast was made for 2014 based on annual accounting data for 2009-2013. Regression analysis, as well as Classification and Regression Tree modelling (CART), were used. The data forecast for 2014 was compared with actual data for that year, and the accuracy of the forecasting model was assessed. The paper outlines the main conditions under which a particular type of earnings manipulation is expected to take place in a company in the accounting period following the current one. It is shown that the main factor influencing the company’s level of earnings manipulation of the next accounting period for both Russian and Chinese companies is the debt ratio calculated as the ratio of total liabilities to total assets. The other important factors are: the company size, return on equity, earnings persistence, the level of earnings manipulation in the current period and stock emission.