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Mandatory internal control and earnings management

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  • Zilong Song
  • Ying Liu
  • Jiaxin Wang

Abstract

This paper examines whether the mandatory implementation of an internal control system influences listed firms’ earnings management in China. We use firms that are mandated for implementing internal control as the treatment group, and firms that do not implement internal control as the control group. We find that the mandatory implementation of an internal control system results in an increase in both real and accrual-based earnings management. We also find that the extra institutional compliance cost induced by implementing a mandatory internal control system was the main cause of the increase in earnings management. Our conclusions thus provide empirical evidence that differs from that on the developed market regarding the research about mandatory internal control and earnings management.

Suggested Citation

  • Zilong Song & Ying Liu & Jiaxin Wang, 2022. "Mandatory internal control and earnings management," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(12), pages 3439-3453, September.
    • Handle: RePEc:mes:emfitr:v:58:y:2022:i:12:p:3439-3453
    DOI: 10.1080/1540496X.2022.2050903
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