The effect of external monitoring mechanisms and inquiry letter supervision on real earnings management: evidence from China

This article used the A-share listed companies on the Shanghai and Shenzhen Stock Exchanges from 2016 to 2024 as samples to examine the impact of external monitoring mechanisms on the real earnings management of enterprises, and focused on analysing the regulatory role of the inquiry letters. It is found that in the environment of high information asymmetry and weak law enforcement, the increase of institutional investors' shareholding aggravates real earnings management. Further, the increase of media attention also induces this behaviour through the market pressure mechanism. The regulatory role of the inquiry letter mainly includes two aspects. On the one hand, the inquiry letter strengthens the pressure on institutional investors and further stimulates the management to carry out real earnings management. On the other hand, inquiry letters can activate the substantive governance function of high-quality auditors and enhance their inhibiting effect on real earnings management. This study reveals the complex transmission path of external regulatory mechanisms and provides empirical evidence for improving the front-line stock exchanges regulatory.