The Earnings Management Strategy of List Companies in Pearl River Delta Region of China Based on Complex Network Theory

This paper aims to detect the methods of earnings management in Pearl River Delta region of China. The data were selected based on the list companies of Pearl River Delta region from 2008 to 2019 and the balanced panel analysis was adopted to pursue the results. After the random effect analysis, this study reaches the conclusion that downward earnings is through total assets, the difference between sales and receivables, fixed assets, and sales and upward earnings is mainly through the changes of sales by the companies in Pearl River Delta region of China.


Introduction
Many studies have suggested that earnings management (EM) in accounting practice is adopted by companies around the world. e EM is actually a "disclosure management" in which corporate managers purposefully control the external financial reporting process to obtain certain private benefits [1]. e earnings management of this paper prefers to operating through violating the accounting principles and accounting estimations by corporate managers for the sake of meeting the desires of the personnel and the company. EM is the kind of accounting practice that not only distorts the financial health of the companies but also has a negative economic consequence to the corresponding accounting information users. erefore, this paper pays close attention to the EM to prevent the misconduct and upgrades the quality of accounting information.
Many elements influence EM. e culture incrementally impacts accounting decisions beyond the effect of the accounting regime [2]. e way how the time encode of languages is significantly associated with earnings management [3]. Earnings management has a significant effect on incentives to reduce expense stickiness [4]. e executive compensation can lead to the implementation of REM, and the improvement of structural power of senior executives will significantly curb the REM based on the compensation of senior executives [5]. e material weakness in the internal control leads management to more likely employ real earnings management [6].
e Pearl River Delta (PRD) region, one of the prospective areas of China, is located in the south of China and has a special tradition, an identical subculture, a different language, and other peculiarity aspects. Too many differences exist between PRD region and the other parts of China, and the differences have led to different accounting practices. is paper aims to determine the EM strategy in the PRD region employed by the companies. e rest of the papers are organized as follows. Section 2 reviews the related research backgrounds. Section 3 briefly introduces about PRD region. Section 4 employs a research approach. Finally, Section 5 provides results and suggestions.

Literature Review
Earnings management is one of the financial topics drawing many scholars' attention all over the world [7].
Earnings management can be classified in the following ways.
Firstly, depending on various targets of earnings management, the manipulation of earnings may be via positive or negative methods. e positive earnings management means uplifting the performances of the entity during a certain accounting period, cutting the expense, speeding the sales, and lessening the depreciation and amortization of longterm assets, which are the strategies often used in this kind. On the contrary, the negative earnings management usually use the methods such as delaying the sales of operation, uplifting the expense, accelerating the depreciation and amortization of long-term assets, and so on [8,9].
Secondly, according to the will of the manager, the earnings management consists of discretion and nondiscretion strategies. e discretion methods involve manipulating the earnings upward or downward to the existing transaction and events by the will of the manager, and it includes the decisions depending on the economic environment, the salary incentive, and other pressures; it is the question of "more or less," and we name it AEM [10]. e nondiscretion methods include recognition of having the identical transaction and events or not, also depending on the will of management; it is the question of "have or not," and we could call this kind of earnings management as REM [11]. Nowadays, as the inspection becomes crucial, more and more managers would like to shift the AEM toward the REM to avoid the inspection of the governance and professionals [12].

PRD Region
e Pearl River Delta region, as one of the flourishing districts, is located in the south-central Guangdong province of China, facing Southeast Asia across the sea. e Pearl River Delta region belongs to the south subtropical region. e climate is warm and humid all year round, with fertile soil, flat terrain, and criss-crossing rivers. Guangzhou, the central city of the Pearl River Delta region, has been the political, economic, and cultural center of Guangdong and Lingnan region for a long time. Lingnan culture is popular, and people have the spirit of change. About half of the gross national product of the Pearl River Delta is achieved through international trades. Many enterprises supply most of their products to the international market. e export-oriented economy is the basic way of development in the Pearl River Delta region. Meanwhile, the region has the advantage of being close to Hong Kong and Macao and facing Southeast Asia. It has the advantage of being home to overseas and has more private enterprises. e advantage of fine seaports, coupled with the preferential policies by the state, makes it a land to attract investment across the world. is district has been drawing the attention of scholars all over the world.

e Source of Data.
e data of this paper were selected from the CSMAR's database and confined to the Pearl River Delta region. Because the economic situation was regular from the year 2008 to 2019, we choose this period to perform research in order to obtain a sound result. e data from national stock exchange were confined to the list companies because the management of this kind showed better condition. At first, 4737 year-company data were obtained through rehearsal, and 1815 year-company data were filtered. At last, 165 list companies consisting of private, stateowned, FDI, and other kinds of companies were selected as a balanced panel.

Methodology.
After filtering some unbalanced data, the balanced panel data were obtained. After the Hausman test, this paper adopts the random effect method to complete this research to find the best use of the advantage of the panel model.

AEM Proxy.
AEM was first introduced by Kothari et al. [11], and it was used to inspect abnormal accrual. Kothari where i and t stand for firm and year, respectively. TA i,t stands for the total accrual for firm i in year t. ΔSALE i,t stands for a change in net sales for firm i in year t. ΔREC i,t stands for a change in account receivables for firm i in year t. PPE i,t stands for the net property, plant, and equipment for firm i in year t. NI i,t stands for the net income for firm i in year t. A i,t stands for total assets for firm i in year t. ε is an error item and stands for the discretionary of the accrual or abnormal accrual (AEM) for an entity i in year t.  [14]: where i and t stands for firm and year. CFO i,t stands for the cash flow from operation for firm i in year t. SALE i,t stands for the net sales for firm i in year t. ΔSALE i,t stands for a change in net sales for firm i in year t. A i,t stands for the total resources for firm i in year t, and ε is the error term and stands for the abnormal CFO (REM) for entity i in year t.

EM Proxy.
e managers prefer the REM because the REM did not obviously lead to violation of the GAAP. Only after the prohibition is strict or the environment is not suitable, the manager will shift toward the AEM. erefore, the AEM and REM are the two instruments the manager often used at the same time. is paper puts AEM and REM together to analyze fin order to obtain the integrity look of earnings management [15]. From (1) and (2), we have the following equation: After rehearsal, we obtain Because α 1i,t and β 1i,t are constants, we use c to refer to them. So, the formula changes as e variable explanations are shown in Table 1 [16]. Table 2.

Analysis. First, the variable summary is shown in
Secondly, we adopt the unit root test to develop the further analysis. e results are in Table 3.
Although in the analysis, the test is passed, we can adopt the panel data for further analysis.
Finally, we adopt the Hausman test to determine the fixed effect or the random effect. e findings of the Hausman test are shown in Table 4 [1].
Because p is 0.4676, we think this panel belongs to a random model. We use the between-group estimator to analyze this. e results of between-group estimator are reflected in Table 5.

Type 1: Downward Earnings Management.
e result shows that x 1 , x 2 , x 3 , and x 5 are downward earnings management elements.
is means that the management of downward earnings can be done through assets, the difference between sales and receivables, fixed assets, and sales. is cluster is labelled as the downward group. Within this group, x 1 is the biggest one, and this shows that the asset tools are widely used by the management to manipulate the earnings downward along with the sales, the differences of sales, and fixed assets.

Type 2: Upward Earnings
Management. x 4 and x 6 are upward earnings management tools because of positive values and so this cluster is labelled as the upward group. x 4 stands for NI i,t /(A i,t-1 ), which is 1.081116, and x 6 stands for ΔSALE i,t /(A i,t-1 ), which is 0.11197.
is means that they would like to manipulate earnings upward via net income and the changes of sales. 1.081116 is more than 0.11197, and this gives us the information that the net income method is more often used than the change of sales for upward earnings.

Co
Company First, we should know whether assets, the difference between sales and receivables, PPE assets, and sales are manipulated when the performance is downward, especially the asset management.
Second, if the earnings is upward, the attention of analysts should shift toward the net income and the changes of sales of the companies.
Last but not the least, the analysts should pay close attention to the strategies of sales delaying or speeding, as well as the discretionary expenditures, decreasing R&D expenses, and administrative expenses.