External governance environment, corporate governance and earnings management

Recent years, with China's economic structure and regional development losing balances and other serious problems, the imcompleted external governance environment provided a breeding ground for the earnings management behavior. This in-depth theoretical study uses datas of listed companies in stock markets of Shanghai and Shenzhen in 2004–2007 as samples to test the differentiation of external governance environment, the company governance mechanism and their interaction to the influence of earnings management. The result shows that corporate governance may inhibit earnings management, and the higher degree of corporate governance is, the less earnings management behavior will be. Countrywide, External governance environment may also restrict earnings management. The interaction of internal and external governance mechanism has inhibitory effect on the behavior of earnings management. The distribution of the extent of earnings management presents gradually decreased from coastal areas to inland and from south to north and of which government intervention, the degree of law in all provinces had regional effects on earnings management.