A Comparative Analysis of Earnings Management Practices in China and Major Economies: The Role of Investor Protection and Government Responses During COVID-19

This study examines earnings management (EM) practices across major global economies, with a focus on China, which has been largely omitted from cross-country EM analyses despite its unique regulatory and governance landscape. Using 229,380 firm-year observations from 2001 to 2022, we compare accrual-based earnings management (AEM) and real earnings management (REM) in China, the United States, leading European economies, and top Asian markets. Our findings reveal that China exhibits higher AEM but lower REM compared to countries with strong investor protections, such as the United States and the United Kingdom. During the COVID-19 pandemic, AEM in China declined, suggesting that effective economic policies mitigated firms’ incentives for earnings manipulation. We also identify a weakened substitution effect between AEM and REM during the crisis. This study extends EM literature by incorporating China into comparative analyses, highlighting the role of legal frameworks and government interventions in shaping corporate financial behavior, particularly during economic disruptions.