GU Pu;ZHAI Shiyun
School of Economics and Management, Tsinghua University;School of Management, China University of Mining & Technology (Beijing)
Throughout the development of the stock market in the past 30 years, every move of the China Securities Regulatory Commission (CSRC) has affected the capital market profoundly, which suggests that the market has obvious policy-oriented characteristic. In the past ten years, the CSRC has experienced five different chairmen with different supervision focuses and approaches. It indicates that chairman changes result in high regulatory uncertainty. Given the unparalleled market position of the CSRC, the regulatory uncertainty arising from chairman changes is likely to have an important impact on firms’ behavior. However, prior research mainly focuses on the impact of specific CSRC’s supervision measures but overlooks the economic consequences of the supervision uncertainty. Taking the chairman changes of the CSRC as the starting point, this study explored the effect of regulatory uncertainty on firms’ earnings quality, the internal path of this effect, and the interaction between regulatory uncertainty and different governance mechanisms. This study developed hypotheses on regulatory uncertainty and earnings quality from the perspectives of benefits and costs. On the one hand, regulatory uncertainty reduces the cost of earnings manipulation in the current period and will increase the cost of earnings manipulation in the long term. On the other hand, regulatory uncertainty increases the benefit of earnings manipulation in the current period and will decrease the benefit of earnings manipulation in the long term. Using the data of A-share listed manufacturing firms from 2010 to 2018, this study examined the effect of regulatory uncertainty on earnings management. It defined regulatory uncertainty based on whether the chairman of the CSRC changes during the period from the firms’ previous to the current annual reports and used the numbers of regulations and administrative penalty for listed firms to measure regulation policy and intensity. This study finds that when the regulatory uncertainty is high, both the accrual and the real earnings management will increase significantly, with earnings quality descending. Specifically, the uncertainty of regulatory policies and the decline in supervision intensity caused by the chairman changes of the CSRC are the direct factors that affect earnings quality. Moreover, a thorough internal control system and high audit quality can alleviate the negative effect of regulatory uncertainty on earnings quality. Further analyses show that regulatory uncertainty also indirectly affects firms’ earnings quality through financing costs. In addition, media supervision, nearby supervision, and dual supervision can help alleviate the adverse effect of regulatory uncertainty on earnings quality. This study may have the following contributions. First, based on the quasi-natural experiment of the CSRC’s chairman changes, this study explores the effect of regulatory uncertainty on firms’ behavior and enriches the research on environmental uncertainty. It also investigates whether the role of other governance mechanisms can be highlighted when the uncertainty of external supervision is high, which extends the research on the interaction between external uncertainty and corporate governance. Second, prior literature mainly discusses the effect of the CSRC’s specific supervision measures on firms’ behavior but neglects the effect of regulatory uncertainty. This study tries to fill this void. Third, this study explores the direct impact of the CSRC’s chairman changes on earnings quality by examining the role of regulatory policies and supervision intensity and analyzes the indirect impact by examining the mediating effect of financing costs. This study helps open the “black box” of the CSRC’s supervision and construct an analytical framework of the impact of regulatory uncertainty on earnings quality. Fourth, this study may also provide some implications on policy continuity and financial support.
regulatory uncertainty;earnings quality;regulatory policy;regulatory intensity;financing cost
To explore the background and basis of the node document