An Empirical Study On Relations Between Chinese Securities Market And Company Earnings Management Under Delisting Mechanism System

This paper aims at exploring the securities systems across Taiwan Strait and the empirical research of the earnings management of control threshold at delisting in China. In this paper the physical content in this research and analysis includes: the review of securities development history, current stage securities management systems across the Strait, phenomena of earnings management over state-owned enterprises in the securities market in China, contingencies and reforms of coming securities markets across the Strait after joining WTO, and the control thresholds of the securities markets.Regarding securities control system, this paper analyzes: the initial public offering, earnings forecast, surplus transferring to capital increment, threshold for delisting and the differences between the securities systems across the Strait, in order to facilitate in-depth exploration into the relations between earnings management and control thresholds. Furthermore, this study also analyzes the phenomena of earnings management under the special ownership structure in China's securities market, including external audit, the functions of CPA, internal ownership structure and its relations with financial statement underestimation, and the market analysis on venture capitals newly released by Shenzhen Stock Exchange.Regarding empirical research, this paper examines the phenomena of the earnings management in the enterprises suffering from loss for consecutive years under the system with delisting control threshold, including the listed companies having suffering from loss for two consecutive years (also referred to as ST stock) and from loss for three consecutive years (also referred to as PT stock before 2002) and from loss for years. In view of that there has been plenty of room for researchers from across the Strait and overseas to conduct comprehensive study on the economic phenomena incurred from delisting control threshold in China in the last years, this paper tries to address the gap left behind, and expects to examine the phenomena of financial variables manipulation in these companies. The conclusions worked out by this paper prove to be parallel to the economic phenomena found overseas at large. Therefore the contributions made through this paper include: the finding of "take a bath" common phenomenon in those listed companies suffering from loss for two and three consecutive years and those suffering from more years of loss changing their CPA to purchase audit opinions in order to reach the control threshold, and severe deficiency in earnings management in state-owned enterprises, most of the financial variables sees an average value, in year next to that the predicted goals are attained, lower than thatin T year, the retrieving loss phenomenon in the listed companies with three consecutive year loss proves to be worse than those with two consecutive year loss, the change of law, abolishment of PT system in 2002, results in the severe phenomena of manipulation of financial variables commonly found among the listed companies with consecutive year loss struggling to meet the control threshold, however, the audits by CPA still proves to be slowing down the function of earnings management.By aggregating the results from this study, in terms of market potential in the securities market across the Strait, China sees a better chance and a larger scale, while Taiwan demonstrates a higher disclosure level in information and management system. Both the delisting mechanisms found across the Strait both rest on the accounting system based on accrued basis, once the threshold governing the accounting data is devised the popular effects of earnings management is derived. Therefore, the securities overseeing authority has no choice but formulating effective laws, implementing the law stringently, amassing the legal and civil compensation responsibilities to internal administrators, external accountants and also those responsible for transaction within group companies, beating insider transactions, so as to effective prevent any transaction which is illegal, infringing the public or under the table from happening. Furthermore, it is strongly suggested that the governmental authority should intensify the control over non-financial information through amending the management regulation of delisting, fortify the external audit functions. Suggestions to individual investor are not only to minimize the chance of relying on information for investment decision making but especially focus on the fundamental surplus of the target company as a logical method; while the governance authority of a listed company should enhance the voluntary disclosure of non-financial information, ethic management and self-reliance and should seek for the interest to the public as investors, incorporate the corporate interest together with the public interest for a win-win situation.