An Empirical Research On IPO Enterprises’ Earnings Management And Its Inlfuence On New Issue Market Anomalies

Initial Public Offering (IPO) is a hot topic in academic circles at home and abroad. Whilewestern research focuses on the traditional IPO "three anomalies"(underpricing, hot-marketand long-term under-performance), domestic academic research in recent years, pays moreattention to the new vision of the unique capital market system in China:"three high" issue(high issue price, high PE ratio and excess offering funds) in primary market and thephenomenon including the changing face of post-IPO performance and the overpricing of newstock in secondary market. So, what is the reason behind this vision? Listing Corporationfinancial manipulation and financial fraud incidents which happened occasionally in thedomestic and foreign capital market these years arouse people’s interest. Previous studieshave shown (Ball and Brown,1968; Beaver,1987; Feltham and Ohlson,1995) that, in theIPO market, for the limitation of pre-IPO public information, earnings information which isthe core of financial reporting system becomes the fundamental indicator which is required bylisting standards. This information is the most important basis for judging the value of thecompany, thus it will also produce significant impact on the listing corporation’s stock price.Therefore, in order to meet the listing qualifications, and to obtain higher IPO price, IPOcompanies have a strong incentive to whitewash and package earnings information throughearnings management behavior. The flexibility of accounting standards also leaves room forearnings management. This paper attempts to explore the following key questions: firstly, in Ashare market, is there significant earnings management behavior in IPO enterprise before andafter IPO? Could it be affected by issue system reform and is there any difference amongboards? Secondly, what is the reason for earnings management behavior before IPO? Is thereany relationship between earnings management and various financial anomalies? How shouldwe consider earnings management behavior, encouraging, abandoning or treating itdialectically?By reorganizing and reviewing the literature, using the theory of earnings function,asymmetry information theory and the principal agent theory, this paper elaborates thepremise, motivation and objective conditions of earnings management, and analyzes impact on it by IPO issue system reform and differences among boards. The mechanism of impact onnew stock price, underpricing, overpricing, changing of performance and long-termunder-performance by earnings management before issue, is also explored. Then, based ontotal accrual method and the sample of A-share IPO firms from2006to2012, measuringearnings management by discretionary accruals which can be calculated by Modified-JonesModel (Dechow et al.,1995), constructing OLS model and probability regression model, thetheories and hypotheses in this paper are empirically tested and the following conclusions canbe reached:Firstly, in general, in the period2006to2012, there was significant earningsmanagement behavior before and after the IPO, and it reached the maximum in the listingyear, and then decreased gradually. Compared with that before the new issue system reform in2009, the earnings management increased after the reform instead of decreasing. The IPOsystem reform did not necessarily lead to the reduction of IPO earnings management. Therewere no obvious earnings management differences between main-board and SME, GEMboard enterprises before IPO issue. But after that, the degree of earnings management of SMEand GEM board companies were significantly greater than that of the main-board IPOcompanies.Secondly, the main purpose of pre-IPO earnings management was to get higher IPOprice, while cutting IPO underpricing, thus reducing the opportunity cost of financing issue,was not the motivation of earnings management behavior. By releasing some “valuable”signal of the enterprise, earnings management behavior before IPO may reduce the probabilityof share overpricing significantly. In the IPO process, the opportunism theory and signaltheory of earnings management motivation concept can be found at the same time.Thirdly, there was a significant post-IPO operating performance decline, and the pre-IPOearnings management was an important reason for this trend. The long-termunder-performance phenomenon, which was labeled by new share return being lower thanaverage market return appeared only within a year after IPO issue. But from a longer-termpoint, the income of IPO stock was higher than average market return. The pre-IPO earningsmanagement behavior significantly reduced the long-term yields of IPO stocks.Previous studies on IPO earnings management were mostly based on data samples of A shares before2006. In contrast with that, by theoretical analysis and empirical testing, thispaper provides a comprehensive and timely review on the effect of capital market reformsince the split share structure reform in2006. The theoretical contributions and innovations ofthis paper are mainly embodied in the following aspects:1. By integrating the earnings function theory, asymmetric information theory andprinciple agency theory systematically, the causes, influencing factors and impact on a varietyof market anomalies in IPO of earnings management behavior are explored and analyzeddeeply, thus a complete framework for theoretical analyze is built. It makes development andsupplement to both the theory of earnings management of listed company and the theory ofIPO performance, while provides a richer theoretical basis to realize the causes of the IPOmarket anomalies.2. This is the first attempt to study the overpricing of IPO issue from the perspective ofearnings management. Combined with the study of earnings management’s impact on IPOmarket anomalies, this paper finds that the motivation of earnings management is varied. Thepurpose of opportunism and releasing valuable signals may exist simultaneously, whileprevious studies considered them to be mutually exclusive. The Findings develop themotivation theory of earnings management, and provide a theoretical basis for judgingearnings management of listed companies dialectically, thus complement the deficiencies ofprevious studies.3. In contrast with previous research on the influencing factors of earnings managementfrom such aspect as the ownership structure, board characteristics, the role of intermediaryorganizations and so on, this paper attempts to study the impact of system changing anddifferences among boards and different conclusions are found. While provide valuablereference for deep thinking and examining the implementation effect and potential negativeimpact of policy system, the results improve the governance theory of earnings managementof listed companies and expand the depth and breadth of research on influencing factors ofIPO earnings management.