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Environmental regulation and real earnings management—Evidence from the SO2 emissions trading system in China

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  • Chen, Xiaoqi
  • Li, Weiping
  • Chen, Zifang
  • Huang, Jiashun

Abstract

This study investigates the effect of environmental regulations on the real earnings management and accrual earnings management of firms. Based on China's sulfur dioxide(SO2) emissions trading program, we adopt a difference-in-difference approach and find that the emissions trading program is negatively associated with real earnings management. The negative relation is stronger for firms with high information asymmetry and firms with poor corporate governance. Our findings suggest that market-based environmental regulations such as the cap-and-trade program can indeed incentivize firms to provide better earnings quality even in a weak institutional environment.

Suggested Citation

  • Chen, Xiaoqi & Li, Weiping & Chen, Zifang & Huang, Jiashun, 2022. "Environmental regulation and real earnings management—Evidence from the SO2 emissions trading system in China," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004086
    DOI: 10.1016/j.frl.2021.102418
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    References listed on IDEAS

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    Cited by:

    1. Li, Weiping & Chen, Xiaoqi & Huang, Jiashun & Gong, Xu & Wu, Wei, 2022. "Do environmental regulations affect firm's cash holdings? Evidence from a quasi-natural experiment," Energy Economics, Elsevier, vol. 112(C).
    2. Liu, Xing & Liu, Fengzhong, 2022. "Environmental regulation and corporate financial asset allocation: A natural experiment from the new environmental protection law in China," Finance Research Letters, Elsevier, vol. 47(PA).
    3. Wen, Huiyu & Fang, Jincheng & Gao, Haoyu, 2023. "How FinTech improves financial reporting quality? Evidence from earnings management," Economic Modelling, Elsevier, vol. 126(C).
    4. Shen, Jun & Tang, Pengcheng & Zeng, Hao & Cheng, Jinhua & Liu, Xiuli, 2023. "Does emission trading system reduce mining cities’ pollution emissions? A quasi-natural experiment based on Chinese prefecture-level cities," Resources Policy, Elsevier, vol. 81(C).
    5. Weiping Li & Xiaoqi Chen & Tao Yuan, 2023. "Green credit policy and corporate cash holdings: Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S2), pages 2875-2903, June.
    6. Long, Wenbin & Qu, Xin & Yin, Saifeng, 2023. "How does carbon emissions trading policy affect accrued earnings management in corporations? Evidence from China," Finance Research Letters, Elsevier, vol. 55(PA).

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    More about this item

    Keywords

    SO2 emissions; Real earnings management; Information asymmetry; Corporate governance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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