Based on the analytical framework of Tomy (2012) and utilizing the 2008 Financial Crisis as a natural experiment, this paper empirically examines the relationship between earnings persistence and the business cycle. First, earnings persistence will significantly decline when economic cycle declines compared with expansion periods. Moreover, cash component of earnings is more sensitive to macro-economic cycle than the accrual component. Second, compared with earnings persistence of companies audited by “non-Big Four”, earnings persistence of those audited by “Big Four” is more susceptible to business cycle. Third, compared with earnings persistence of companies with highly concentrated shareholding, earnings persistence of companies with low degree of ownership concentration is more susceptible to business cycle. The results demonstrate that, economic cyclical fluctuations, as a basic role of economic operation in macro-economy, can exert a direct effect on the earnings persistence of micro-enterprises by affecting firm fundamentals as well as earnings management. In addition, the effect of firm fundamentals on earnings persistence is pro-cyclical while the effect of earnings management on earnings persistence is counter-cyclical. Therefore, the higher the quality of accounting information and corporate governance, the more susceptible earnings persistence is to business cycle. Our study contributes to finding the role and the direction of earnings management affect earnings persistence over business cycle and providing empirical evidence to enhance our understanding of the mechanism that business cycle can influence earnings persistence.
刊于《China Accounting and Finance Review》,2013,15(4)
