Abstract: By taking the A-share listed companies in China from 2012 to 2017 as the initial research sample, using the new Environmental Protection Lawas an exogenous event, and adopting DID analysis method,the paper empirically tests the impact of the event on earnings management of heavily polluted enterprises. It is found that the heavy pollution enterprises have made significant upward earnings management compared with the non-heavy pollution enterprises after the implementation of the new Environmental Protection Law, and this earnings management shows a certain degree of marginal diminishing effect；after further investigation, we find that the heavy pollution enterprises have made more significant upward earnings management behavior especially in smaller enterprises or enterprises with poorer profitability. This paper provides an empirical evidence on how micro-enterprises react after the implementation of the new Environmental Protection Law. And by comparing the sensitivity differences of enterprises with different scales and different profitability to the impact of the new Environmental Protection Law, it is helpful to understand the mechanism of the Prospect Theory.

Key words: New Environmental Protection Law, heavy pollution enterprise;earnings management, Prospect Theory