The Empirical Study Of Performance On MBO Of Chinese Listed Companies Based On Earnings Management

MBO has experienced transition and development stages in China, from1997, the first implementation of Chinese listed company MBO, till now. Chinese economists do not get an agreement with the suitability of MBO in reform of state-owned enterprises. Supporters (Wei Wang, Wei Zhong,2003) believe that there is practical significance in implementing MBO in China. First, that can resolve the problems of great amount of state-owned shares and create the channels for state-owned capital withdrawing from the competitive fields. Second, that can inspire entrepreneurs’passion and enthusiasm and push them to improve the company’s performance. Third, that will help to construct modern company system and improve the company’s corporate governance structure. However, the opponents (Xipeng Liu, Xianpin Lang,2004) insist that the lower price induces the loss of state-owned assets, the funds raising in implementing MBO are illegal, and after MBO, the managers will use the rights of control to invade the legitimate rights and interests of the company’s minority shareholders. Although there are some unfair and illegal behaviors in implementing MBO in China, there are no direct connections between MBO and the loss of state-owned assets, furthermore, totally denying the validity of MBO in China. As a system innovation in organization structure, MBO has positive effects in economic system reform, reducing enterprise agency costs, and promoting management incentive mechanism. Along with the development of Chinese economy market, perfecting the system of systems and effective regulatory measures will play an active role in state-owned enterprises reform, civilian-run economy development, and the corporate governance structure improvement.Based on domestic and foreign-related theories and empirical studies about MBO, this article uses specification analysis and empirical analysis to analyze the effects of MBO in improving the performance of Chinese listed companies. By analyzing the present situation of Chinese listed companies MBO and the differences between domestic and foreign companies MBO by case studies and comparative studies, there are many problems in Chinese listed companies implementing MBO, such as unreasonable pricing, illegal borrowing, and incomplete information disclosure etc., which will most likely induce earnings management behaviors during MBO. Therefore, this article uses Modified Jones Model to evaluate the earnings management of listed companies during MBO, and uses factor analysis to evaluate the effects of MBO to improve the operating efficiency of Chinese listed companies. Finally, this article analyzes the behaviors of excessive earnings management of listed companies before and after MBO. Based on the empirical studies, this article draws five conclusions:First, there exits earnings management behaviors decreasing the profits during the year of and before implementing MBO, and increasing the profits the second year after implementing MBO.The phenomenon of earnings management during MBO proves the existence of wealth transferring effect. The managers manipulate earnings of the listed companies before implementing MBO in order to lower the price of the listed company’s shares. The system defects, lack of institutional investors, and weak awareness of small and medium-sized investors provide the convenient conditions for managers to manipulate earnings during MBO.Second, after MBO, the listed company’s size increases, and the profitability decreases, which result the listed company’s performances changing not significantly.The increase in size of listed companies is not caused by the improvements of profitability of listed companies, but caused by borrowing loans from banks and the increases of operating liabilities. The size increasing of listed companies does not achieve scale efficiency, but increase the operating cost rate and management cost rate. Therefore the profitability of listed companies decreases after MBO.Third, there exits excessive paying cash dividends of Chinese listed companies before and after MBO, especially one year before MBO till one year after MBO.The behavior of excessive paying cash dividends before and after MBO is one of the most important methods that the listed company’s managers pursue the rights of control to achieve excessive earnings management. The excessive cash dividends paid before MBO can decrease the net income per share of listed companies, and after MBO can raise the money for managers to repay the loans because of MBO. Paying excessive cash dividends increases the operational risks and costs, and decreases the potential capacity of development of listed companies.Forth, the listed companies’average related party transaction amounts after MBO are far more than before MBO, and the extent of earning management is related to the related party transactions.The average amounts of purchasing and selling goods, services, and assets, and guarantee on related transactions after MBO are more than before MBO. Furthermore, the pricing agreements are common in related party transactions of purchasing and selling goods, services, and assets, and renting. The extent of earnings management of listed companies during MBO is related to the related party transactions. The more amount of related party transactions of purchasing and selling goods, services, and assets, and renting, the more earnings management of listed companies during MBO.Finally, lack of regulations and policies, the motivations of Chinese listed companies MBO are not the same as foreign companies MBO. After MBO, the managers of Chinese listed companies are clining to achieve the rights of control.The motivation of MBO of Chinese listed companies is to buy the shares of listed companies in lower price. The managers have to lend from private or illegal because of the great amount of purchasing funds and limited channels for raising money. After MBO, there are no enough incentives and pressures for listed companies’ managers to improve the performance of listed companies. Under the pressure of repaying loans, the managers are more clining to achieve the rights of control even if that will damage the legitimate rights and interests of the company and other shareholders.This article has three innovation points:First, this article points out the reason of the change of motivation of Chinese listed companies MBO by analyzing the behaviors of Chinese listed companies in MBO. By analyzing the present situation of Chinese listed companies MBO, this article uses case study and comparative study to analyze the differences between domestic and foreign companies MBO, especially in pricing, loaning, exit, and supervision etc., to conclude the behaviors of Chinese liseted companies in MBO. This article finds out the relationship between the regulation system and earnings management during MBO, and the motivation of Chinese listed companies MBO is to buy the listed companies’ shares in lower prices rather than the existence of potential improvement capacity of listed companies.Second, this article evaluates the peformance of listed companies MBO based on earnings management. The empirical studies do not consider the potential influence of earnings management to the performance of listed companies during MBO. The conclusions of empirical studies about earnings management duiring MBO are totally different. However earnings management during MBO will definitely influence the accounting profits and financial data of listed companies, therefore impacting the effects of MBO toward the performance of listed companies. Since the available empirical studies get different conclusions about the earnings management of Chinese listed companies during MBO period, in order to obviously reflect the effects of MBO toward the performance of listed companies, this article combines the traditional financial ratios based on accrual basis with financial ratios based on cash flow to construct an analysis system. Finally, based on19financial indicators in size, earnings quality, the capacity of profitability, operation, solvency and development, this article uses factor analysis to evaluate the effects of MBO toward the operating efficiency of Chinese listed companies.Third, this article analyzes why the listed companies’performance do not change after MBO based on the existence of excessive earnings management behaviors of listed companies before and after MBO. By facter analysis, this article draws the conclusion that the listed company’s performance does not change significantly after MBO. Therefore, by further analyzing the changes of size, earnings quality, capacity of profitability and operation, this article proves that after MBO, the sizes of listed companies increase and the profitability of main business of listed companies decrease. In order to find why the performance of listed companies does not change after MBO, this article analyzes the excessive earnings management behaviors of listed companies during MBO. There exist excessive paying cash dividends and related party transitons, which will increase the operating risks and costs of listed companies and decrease the potential development of listed companies. That can partly explain why the performance of listed companies does not change significantly after MBO and further proves the conclusions of this article. The purpose of Chinese listed companies MBO is to purchase the listed companies’shares in lower prices and after MBO, the managers of listed companies are more clining to pursuing rights of control under the pressure of repaying loans.Because of the capacity of author, some points need further study and improve. First, because of few Chinese listed companies MBO and the short study period, this article does not analyze the industry differences toward the performance of listed companies. Second, during study period, the Chinese government starts the split share structure reform. Since the shares holding by managers still cannot circulate in stock market during the study period, this article does not consider this factor. Third, the accounting policies change many times during study period, especially the Accounting Standards on15Feb,2006, which will definitely influence the performance of listed companies. However, this article just analyzes the influence of accounting policies changes toward the financial data of listed companies, rather than completely analyze the changes of accounting policies to the performance of listed companies. Finally, since there is so difficult to collect and analyze non-financial indicators of Chinese listed companies, this article uses financial data only to analyze the performance of listed companies, which may influence the objectivity of evaluation of the performance of listed companies.