Earnings management using disposal of assets: Empirical evidence from Chinese listed companies

Using Chinese A-shared listed companies from 2009 to 2010 for the study sample, this paper investigates whether managers manipulate earnings through the disposal of non-current assets and which factors affect this behavior. The results show that: when real income is below earnings benchmarks, firms tend to increase earnings through the disposal of assets, and the probability of beat earnings benchmarks through the disposal of assets is negatively associated with the differences between earning benchmarks and real income and non-recurring income and positively with debt-asset ratio. When real income is above earnings benchmarks, firms tend to decrease earnings through the disposal of assets, and the probability of smoothing earnings through the disposal of assets is positively associated with the differences between real income and earnings benchmarks and negatively with debt-asset ratio and non-recurring income. Additionally, we also find that the revenue from disposal of assets in the fourth quarter is significantly higher than any of the other three quarters. This study not only contributes to the literature on real activities manipulation, but also provides a new reference for the evaluation of advantages and disadvantages of the historical cost measurement.