Stock market liberalization and earnings management: Evidence from a quasi‐natural experiment in China
利用中国部分公司先后向外资开放（试点企业）的准自然实验，发现股市开放后试点企业显著减少了应计盈余管理和财务报告违规，主要机制是媒体、机构投资者和审计师的外部监督加强。
Abstract Exploiting a quasi‐natural experiment in China in which some firms become investible to foreign investors across different times (i.e., pilot firms), we explore the role that stock market liberalization plays in shaping firms' earnings management activities. In one direction, the national‐level liberalization reform may elicit public attention from various stakeholders, piling pressure on managers to refrain from distorting their firms' earnings. In the other direction, the various restrictions that the government imposes on foreign investors cast doubt on whether China's capital control reform will materially affect pilot firms' incentives and scope to manipulate their earnings. To gauge which force is more dominant, we rely on a staggered difference‐in‐differences research design and find that pilot firms significantly reduce the magnitude of their discretionary accruals and the incidence of financial reporting irregularities from the pre‐ to the post‐liberalization period, compared to non‐pilot firms during the same time frame. Additional analysis implies that externalities in the form of stricter external monitoring from the media, institutional investors, and auditors is the major mechanism that helps market liberalization curb firms' earnings management. Our research provides insight on the importance of financial global integration to firms' earnings management practices.