Consequences of earnings management triggered by delisting regulation: Evidence in China

This paper investigates the consequences of earnings management triggered by earnings-based delisting regulations in China. Our main finding is that there is a positive relationship between earnings management to avoid delisting by firms subject to delisting regulations and the subsequent performance, measured by operating performance and recurrence of losses. The results are robust to the various performance measures, including gross margin, assets turnover, and probability of bankruptcy, indicating that performance improvement is supported by fundamentals. Although previous literature documents that firms subject to delisting opportunistically manage their earnings to circumvent regulations, the implementation of earnings management in the context of delisting regulations is in the best interest of shareholders. We confirm this argument by showing positive market consequences of earnings management induced by delisting regulations.