Forecasting the level of earnings management of Russian and Chinese companies

Investment Management and Financial Innovations. 2017. Vol. 14. No. 2. P. 264–280.

Lukianova A., Nikulin E., Zinchenko A.

The purpose of the current paper is to elaborate a model to forecast a particular type of
earnings management by companies: upward earnings management, downward earnings
management or the absence of significant manipulation.
The sample analyzed in the current paper comprises 664 Russian and 2,380 Chinese
public companies for the period 2009–2014. The forecast was made for 2014 based on
annual accounting data for 2009–2013. Regression analysis, as well as Classification
and Regression Tree modelling (CART), were used. The data forecast for 2014 was
compared with actual data for that year, and the accuracy of the forecasting model was
assessed.
The paper outlines the main conditions under which a particular type of earnings manipulation
is expected to take place in a company in the accounting period following
the current one. It is shown that the main factor influencing the company’s level of
earnings manipulation of the next accounting period for both Russian and Chinese
companies is the debt ratio calculated as the ratio of total liabilities to total assets. The
other important factors are: the company size, return on equity, earnings persistence,
the level of earnings manipulation in the current period and stock emission.

Keywords: decision tree, analytical forecasting, earnings management