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Legal shifts and corporate strategy: The impact of China’s New Securities Law on earnings management

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  • Zhao, Yikai
  • Zhang, Shutong
  • Geng, Xinyi

Abstract

This study examines the impact of China’s New Securities Law (NSL) on real earnings management (REM) practices among listed companies. Employing a difference-in-differences (DID) approach, we find that the implementation of NSL significantly reduces REM activities. Our results remain robust after addressing concerns about unobserved confounders and a series of robustness checks. Further analysis shows that this effect is driven by enhanced internal control, improved audit quality, and increased retail investor monitoring. The reduction in REM is more pronounced in SOEs, firms with stronger board independence, abnormal audit fees, and higher executive pay. These findings highlight the policy significance of broad legal reforms beyond accounting standards in shaping corporate behavior and governance in emerging markets.

Suggested Citation

  • Zhao, Yikai & Zhang, Shutong & Geng, Xinyi, 2025. "Legal shifts and corporate strategy: The impact of China’s New Securities Law on earnings management," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001470
    DOI: 10.1016/j.najef.2025.102507
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    Keywords

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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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