Does an item change trigger earnings management? Evidence from asset disposal income in China

We explore a unique regulatory change in 2017 in China that requires firms to move the non-current assets disposal income in the income statement from below the line of operating income to above it. We find that firms that have incentives to avoid losses conduct upward earnings management using the non-current assets disposal income after the regulatory change. We also find that this earnings management behaviour is more pronounced for firms in the growth and decline stages, and for firms with weak market competition power. In addition, such behaviour damages firm’s operating performance and innovation in the next year.