This empirical study aims to reveal that companies conduct earnings management
by the fuzzy zone of allowance policy. It investigates the interrelationship between
the allowance for doubtful accounts and earning management with the use of three
hypotheses. The data used are from Chinese listed companies for the period 2008-
2017. The Chinese accounting standards have experienced two major changes and
because of that, this study is divided into two parts. After the modification of 2014,
the allowance for doubtful accounts and the reversal faced a huge difference
comparing with previous rules. The findings prove that before 2014, Chinese listed
companies manipulated the earnings with the help of allowance for doubtful
accounts. However, afterwards the possibility of earning management deteriorates,
showing the effectiveness of the fair value accounting standard improvement.
Furthermore, return on equity shows less significant relationship with allowance for
doubtful accounts. Although a previous study considers debt contracts enhances the
negative relationship with allowance for doubtful accounts, the findings show
instead a positive one. This simply means that high leverage ratio creates higher
allowance for doubtful accounts.
JEL classification numbers: G28, M41, C20.
Keywords: Earning Management; Allowance for Doubtful Accounts; Regression
Analysis.
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