The Unintended Consequence of Environmental Regulations on Earnings Management: Evidence from Emissions Trading Scheme in China
Abstract
:1. Introduction
2. Theoretical Analysis and Research Hypothesis
3. Data and Methodology
3.1. Data and Sample Selection
3.2. Measurement for Earnings Management
3.3. Measurement for Control Variables
3.4. Sample Statistics
3.5. Difference-in-Difference
3.6. Model Specification
4. Empirical Results
4.1. Main Result
4.2. Mechanism Analysis
4.2.1. Mechanism—Financial Constraints
4.2.2. Mechanism—Firm Opacity
4.2.3. Mechanism—Market Competition
4.2.4. Mechanism—Emission Mitigation Pressure
5. Conclusions and Policy Implications
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Acknowledgments
Conflicts of Interest
References
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Variables | Definitions |
---|---|
Discretional Accruals (DA) | refers to change in operating income, refers to change in account receivable and PPE t refers to net fixed asset. |
Real Earnings Management (TREM) | |
Size | Log(Total Assets) in year t−1 |
Leverage | Total Debt/Total Asset in year t−1 |
Free Cash flow | Operating Cash flow/Total Asset in year t−1 |
Tangibility | Tangible Assets/Total Asset in year t−1 |
Loss | A dummy variable equal to 1 when the firm has a negative net earnings in year t−1 |
Growth | Sales growth in year t−1 |
Duality | A dummy variable equal to 1 if the firm’s chairman and general manager are the same person |
Independent Director | The number of independent directors/total directors in year t−1 |
Board | Number of board members in year t−1 |
Top1 | Shareholding ratio of the largest shareholder in year t−1 |
Age | Year of listing in year t−1 |
Panel A | (1) | ||||||
Treat | |||||||
Size | 0.335 *** | ||||||
(0.035) | |||||||
Lev | −0.469 ** | ||||||
(0.220) | |||||||
Free Cash Flow | 0.786 | ||||||
(0.583) | |||||||
Tangibility | 2.411 *** | ||||||
(0.203) | |||||||
Loss | 0.226 ** | ||||||
(0.111) | |||||||
Growth | −0.176 * | ||||||
(0.105) | |||||||
Duality | 0.294 *** | ||||||
(0.079) | |||||||
Independent Director | 1.710 ** | ||||||
(0.697) | |||||||
Board | 0.051 ** | ||||||
(0.023) | |||||||
Top1 | 0.831 *** | ||||||
(0.230) | |||||||
Age | 0.003 | ||||||
(0.006) | |||||||
_cons | −12.069 *** | ||||||
(0.727) | |||||||
N | 14,622 | ||||||
R-Squared | 0.062 | ||||||
Panel B | UnMatched | Mean | %reduct | t-test | |||
Variable | Matched | Treated | Control | %bias | |bias| | t | p > |t| |
Size | U | 22.784 | 22.158 | 50.3 | 15.44 | 0.000 | |
M | 22.63 | 22.653 | −1.9 | 96.3 | −0.4 | 0.687 | |
Lev | U | 0.44789 | 0.40711 | 20.8 | 6.2 | 0.000 | |
M | 0.43962 | 0.44092 | −0.7 | 96.8 | −0.14 | 0.887 | |
Free Cash Flow | U | 0.06088 | 0.04849 | 19.6 | 5.71 | 0.000 | |
M | 0.05888 | 0.06021 | −2.1 | 89.3 | −0.45 | 0.650 | |
Tangibility | U | 0.28483 | 0.20298 | 52.6 | 16.2 | 0.000 | |
M | 0.26771 | 0.26029 | 4.8 | 90.9 | 1.02 | 0.309 | |
Loss | U | 0.1241 | 0.11219 | 3.7 | 1.13 | 0.259 | |
M | 0.12346 | 0.12778 | −1.3 | 63.7 | −0.28 | 0.783 | |
Growth | U | 0.13736 | 0.17027 | −9.8 | −2.69 | 0.007 | |
M | 0.14342 | 0.12626 | 5.1 | 47.9 | 1.18 | 0.237 | |
Duality | U | 0.28956 | 0.28722 | 0.5 | 0.16 | 0.877 | |
M | 0.28507 | 0.31548 | −6.7 | −1202.4 | −1.4 | 0.162 | |
Independent Director | U | 0.37972 | 0.37598 | 6.6 | 2.1 | 0.036 | |
M | 0.37678 | 0.37851 | −3.1 | 53.8 | −0.65 | 0.515 | |
Board | U | 8.7911 | 8.453 | 19.3 | 6.32 | 0.000 | |
M | 8.6981 | 8.6665 | 1.8 | 90.7 | 0.38 | 0.703 | |
Top1 | U | 0.37013 | 0.33222 | 25.8 | 7.91 | 0.000 | |
M | 0.36689 | 0.36095 | 4 | 84.3 | 0.84 | 0.399 | |
Age | U | 12.01 | 10.161 | 25.8 | 7.68 | 0.000 | |
M | 11.557 | 11.691 | −1.9 | 92.7 | −0.39 | 0.696 |
Panel A | N | Mean | SD | Min | Median | Max |
Discretional Accruals | 10,226 | 0.073 | 0.068 | 0.001 | 0.054 | 0.395 |
Real Earnings Management | 10,226 | −0.001 | 0.178 | −0.594 | 0.008 | 0.482 |
Size | 10,226 | 22.203 | 1.106 | 20.057 | 22.075 | 26.064 |
Leverage | 10,226 | 0.405 | 0.195 | 0.054 | 0.395 | 0.852 |
Free Cash Flow | 10,226 | 0.052 | 0.064 | −0.139 | 0.05 | 0.238 |
Tangibility | 10,226 | 0.204 | 0.133 | 0.002 | 0.187 | 0.68 |
Loss | 10,226 | 0.117 | 0.321 | 0 | 0 | 1 |
Growth | 10,226 | 0.153 | 0.343 | −0.519 | 0.106 | 2.187 |
Duality | 10,226 | 0.312 | 0.463 | 0 | 0 | 1 |
Independent Director | 10,226 | 0.376 | 0.053 | 0.333 | 0.364 | 0.571 |
Board | 10,226 | 8.462 | 1.537 | 5 | 9 | 14 |
Top1 | 10,226 | 0.336 | 0.141 | 0.088 | 0.317 | 0.729 |
SOE | 10,226 | 0.318 | 0.466 | 0 | 0 | 1 |
Age | 10,226 | 10.197 | 7.172 | 1 | 8 | 30 |
Panel B | Full sample | |||||
Benchmark | Treat (CO2 ETS) | Total | ||||
Year | N | % | N | % | N | % |
2012 | 51 | 5.72 | 364 | 3.9 | 415 | 4.06 |
2013 | 67 | 7.52 | 568 | 6.08 | 635 | 6.21 |
2014 | 71 | 7.97 | 646 | 6.92 | 717 | 7.01 |
2015 | 75 | 8.42 | 693 | 7.42 | 768 | 7.51 |
2016 | 70 | 7.86 | 721 | 7.72 | 791 | 7.74 |
2017 | 74 | 8.31 | 773 | 8.28 | 847 | 8.28 |
2018 | 75 | 8.42 | 854 | 9.15 | 929 | 9.08 |
2019 | 146 | 16.39 | 1565 | 16.76 | 1711 | 16.73 |
2020 | 152 | 17.06 | 1782 | 19.09 | 1934 | 18.91 |
2021 | 110 | 12.35 | 1369 | 14.67 | 1479 | 14.46 |
N | 891 | 100 | 9335 | 100 | 10,226 | 100 |
(1) | (2) | |
---|---|---|
Discretional Accruals | Real Earnings Management | |
Treat × Post | 0.024 *** | 0.080 *** |
(0.006) | (0.015) | |
Size | −0.013 *** | 0.020 *** |
(0.003) | (0.007) | |
Leverage | −0.001 | −0.065 *** |
(0.011) | (0.025) | |
Free Cash Flow | −0.006 | −0.191 *** |
(0.017) | (0.037) | |
Tangibility | 0.000 | −0.049 * |
(0.014) | (0.029) | |
Loss | 0.002 | −0.002 |
(0.003) | (0.005) | |
Growth | 0.005 ** | −0.005 |
(0.002) | (0.006) | |
Duality | 0.003 | 0.003 |
(0.003) | (0.006) | |
Independent Director | −0.001 | −0.018 |
(0.030) | (0.057) | |
Board | 0.001 | 0.000 |
(0.001) | (0.003) | |
Top1 | 0.000 | 0.074 * |
(0.016) | (0.040) | |
Age | 0.002 *** | 0.005 *** |
(0.001) | −(0.001) | |
_cons | 0.335 *** | −0.420 ** |
(0.078) | (0.171) | |
Firm | Yes | Yes |
Year | Yes | Yes |
Industry | Yes | Yes |
N | 10,226 | 10,226 |
R-Squared | 0.030 | 0.044 |
(1) | (2) | (3) | (4) | (5) | (6) | |
---|---|---|---|---|---|---|
Discretional Accruals | Discretional Accruals | Discretional Accruals | Real Earnings Management | Real Earnings Management | Real Earnings Management | |
Treat × Post | 0.021 *** | 0.024 *** | 0.029 *** | 0.074 *** | 0.080 *** | 0.097 *** |
(0.006) | (0.006) | (0.007) | (0.015) | (0.015) | (0.016) | |
KZ | 0.003 *** | −0.006 *** | ||||
(0.001) | (0.002) | |||||
KZ × Treat × Post | 0.007 *** (0.002) | 0.019 *** (0.006) | ||||
LFC | −0.000 | −0.000 | ||||
(0.000) | (0.000) | |||||
LFC × Treat × Post | 0.110 * (0.065) | 0.219 * (0.119) | ||||
SA | −0.002 | 0.080 | ||||
(0.026) | (0.055) | |||||
SA × Treat × Post | 0.049 ** (0.023) | 0.190 *** (0.051) | ||||
Controls | Yes | Yes | Yes | Yes | Yes | Yes |
Firm | Yes | Yes | Yes | Yes | Yes | Yes |
Year | Yes | Yes | Yes | Yes | Yes | Yes |
Industry | Yes | Yes | Yes | Yes | Yes | Yes |
N | 10,226 | 10,226 | 10,226 | 10,226 | 10,226 | 10,226 |
R-Squared | 0.033 | 0.030 | 0.030 | 0.045 | 0.045 | 0.045 |
(1) | (2) | (3) | (4) | (5) | (6) | |
---|---|---|---|---|---|---|
Discretional Accruals | Discretional Accruals | Discretional Accruals | Real Earnings Management | Real Earnings Management | Real Earnings Management | |
Treat × Post | 0.022 *** | 0.025 *** | 0.025 *** | 0.077 *** | 0.084 *** | 0.082 *** |
(0.006) | (0.006) | (0.006) | (0.015) | (0.015) | (0.015) | |
Transparency Rating | −0.002 | −0.004 | ||||
(0.002) | (0.003) | |||||
Transparency Rating × Treat × Post | −0.029 *** (0.005) | −0.044 *** (0.012) | ||||
Analysts Attention | 0.003 *** | −0.007 *** | ||||
(0.001) | (0.003) | |||||
Analysts Attention × Treat × Post | −0.008 ** (0.004) | −0.015 * (0.009) | ||||
Big4 | −0.005 | 0.005 | ||||
(0.009) | (0.022) | |||||
Big4 × Treat × Post | −0.028 * | −0.074 * | ||||
(0.016) | (0.040) | |||||
Contorls | Yes | Yes | Yes | Yes | Yes | Yes |
Firm | Yes | Yes | Yes | Yes | Yes | Yes |
Year | Yes | Yes | Yes | Yes | Yes | Yes |
Industry | Yes | Yes | Yes | Yes | Yes | Yes |
N | 10,226 | 10,226 | 10,226 | 10,226 | 10,226 | 10,226 |
R-squared | 0.035 | 0.031 | 0.030 | 0.047 | 0.046 | 0.044 |
(1) | (2) | (3) | (4) | (5) | (6) | |
---|---|---|---|---|---|---|
Discretional Accruals | Discretional Accruals | Discretional Accruals | Real Earnings Management | Real Earnings Management | Real Earnings Management | |
Treat × Post | 0.031 *** | 0.030 *** | 0.017 ** | 0.091 *** | 0.094 *** | 0.065 *** |
(0.007) | (0.007) | (0.008) | (0.015) | (0.016) | (0.018) | |
HHI | 0.006 | 0.023 | ||||
(0.011) | (0.027) | |||||
HHI × Treat × Post | 0.189 ** | 0.344 *** | ||||
(0.076) | (0.130) | |||||
Listed Firms | 0.003 | 0.006 | ||||
(0.004) | (0.008) | |||||
Listed Firms × Treat × Post | −0.014 * (0.008) | −0.033 ** (0.015) | ||||
Lerner Index | 0.020 ** | 0.054 *** | ||||
(0.008) | (0.019) | |||||
Lerner Index × Treat × Post | 0.101 * (0.053) | 0.193 * (0.101) | ||||
Controls | Yes | Yes | Yes | Yes | Yes | Yes |
Firm | Yes | Yes | Yes | Yes | Yes | Yes |
Year | Yes | Yes | Yes | Yes | Yes | Yes |
Industry | Yes | Yes | Yes | Yes | Yes | Yes |
N | 10,226 | 10,226 | 10,226 | 10,226 | 10,226 | 10,226 |
R-squared | 0.031 | 0.030 | 0.033 | 0.045 | 0.045 | 0.049 |
Panel A | CO2 Emissions at Firm Level | |||
≥Median | <Median | |||
Discretional Accruals | Real Earnings Management | Discretional Accruals | Real Earnings Management | |
Treat × Post | 0.025 *** | 0.088 *** | 0.006 | 0.032 |
(0.009) | (0.023) | (0.006) | (0.022) | |
Controls | Yes | Yes | Yes | Yes |
Firms | Yes | Yes | Yes | Yes |
Year | Yes | Yes | Yes | Yes |
Industry | Yes | Yes | Yes | Yes |
N | 4968 | 4968 | 5258 | 5258 |
R-Squared | 0.032 | 0.046 | 0.041 | 0.060 |
Panel B | Level of Carbon Market Activity | |||
High | Low | |||
Discretional Accruals | Real Earnings Management | Discretional Accruals | Real Earnings Management | |
Treat × Post | 0.018 * | 0.096 *** | 0.034 *** | 0.027 |
(0.010) | (0.021) | (0.012) | (0.043) | |
Controls | Yes | Yes | Yes | Yes |
Firms | Yes | Yes | Yes | Yes |
Year | Yes | Yes | Yes | Yes |
Industry | Yes | Yes | Yes | Yes |
N | 2426 | 2426 | 1762 | 1762 |
R-Squared | 0.044 | 0.077 | 0.065 | 0.106 |
Panel C | Status of Carbon Peaking at Province Level | |||
Peaked | On the way | |||
Discretional Accruals | Real Earnings Management | Discretional Accruals | Real Earnings Management | |
Treat × Post | 0.013 | 0.045 | 0.023 *** | 0.090 *** |
(0.016) | (0.045) | (0.006) | (0.016) | |
Controls | Yes | Yes | Yes | Yes |
Firms | Yes | Yes | Yes | Yes |
Year | Yes | Yes | Yes | Yes |
Industry | Yes | Yes | Yes | Yes |
N | 875 | 875 | 9351 | 9351 |
R-Squared | 0.075 | 0.172 | 0.032 | 0.040 |
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Chen, W.; Tian, Y. The Unintended Consequence of Environmental Regulations on Earnings Management: Evidence from Emissions Trading Scheme in China. Sustainability 2024, 16, 7092. https://doi.org/10.3390/su16167092
Chen W, Tian Y. The Unintended Consequence of Environmental Regulations on Earnings Management: Evidence from Emissions Trading Scheme in China. Sustainability. 2024; 16(16):7092. https://doi.org/10.3390/su16167092
Chicago/Turabian StyleChen, Wei, and Yuan Tian. 2024. "The Unintended Consequence of Environmental Regulations on Earnings Management: Evidence from Emissions Trading Scheme in China" Sustainability 16, no. 16: 7092. https://doi.org/10.3390/su16167092
APA StyleChen, W., & Tian, Y. (2024). The Unintended Consequence of Environmental Regulations on Earnings Management: Evidence from Emissions Trading Scheme in China. Sustainability, 16(16), 7092. https://doi.org/10.3390/su16167092