Does Private Equity Affect Earnings Management And Stock Selling Of IPO Enterprises?

Under China's current market environment,the existence of earnings management seems very common.Generally,earnings management is closely connected with the interest of top managements.The amount of the profit,expenditures and cash flows not only affect the annual income or several years'incomes of top managements,but also have influence on the preferential policies which are given by the government.Small and medium-sized enterprises,especially the family-run ones are incline to conduct earnings management due to their imperfect financial regulations and lack of internal audit system.After China GEM board opened,frequent bad performance of enterprises after IPO process are kind of reflection on earnings management problems.PE is close to GEM board because for one thing,GEM board solves the problem of exits of PE investment and for another PE is able to provide more fund support for small and medium-sized enterprises.However,recently PE industry has gradually been found corruption problems.In developed financial markets,PE conducts as a supervisior due to a better economic environment and perfect legislation.Because most of enterprises PE invested were all in start or growth stages,PE would be very stricted with the financial conditions and growth prediction of the investees.But now in China,PE is targeting more at Pre-IPO model because of lack of IPO permit and good legislation.So that PE,GEM board and earnings management are now bound together.Whether PE participated in the earnings management of IPO enterprises,what kind of role PE played during earnings management process,whether PE significantly affected the selection of earnings management methods,and whether PE made aggression upon investors'profit by continuous earnings management after IPO when they prepared to sell out their stock shares are all the topics we want to discuss in this dissertation.During the six years GEM board has started,there are long-term PE which has invested more than one year and short term PE whose investment duration is less than one year.In order to achieve the big value of investments,PE would suggest the enterprises to conduct earnings management to increase its profit and keep the growth ratio a stable level,thus eventually affect the valuation of enterprises and increase IPO price to acquire higher profits for PEs' exits.However,earnings management will cause information distortion of financial reports and growth ratio of enterprises and as well widen information asymmetry between internal managers and external accounting information users and finally mislead the regulators on their judgments of the value of enterprises.On one hand,it will do harm to enterprises' long-term operations,on the other hand,will not be conductive to the healthy development of the GEM board.At this point,PE,enterprises,and regulators will game on how and what extent earnings management exists in the IPO process.PE and enterprises will try to make the financial information looks better to pursue a higher IPO price by controlling earnings management under a guaranteed range for a successful IPO.While regulators tend to minimize excess positive earnings management in order to ensure that a good enterprise finances in the stock market and the maximum social welfare can be achieved.During this process,long-term and short-term PE will probably make different desicions due to their own benefits and reputations too.Based on this analysis,the dissertation chooses 406 stocks of GEM board to research the conditions of earnings management which exists in whole IPO process.We will target on the relationship between the background information of PE and the extent of enterprises' earnings management.The main point we concern is to reveal how the Discretionary Accrued Earnings Management(DA)and Real Earnings Management(REM)occur in enterprises,what characters they have and what factors are mainly relevant to the amount of them.After that,by calculating Cumulative Abnormal Return(CAR)and Earnings Response Coefficient(ERC),we analysis how stocks' selling of PE and majority shareholders affect the stock price of individual enterprise.The results are listed below:A. Before IPO,DA is common for every IPO candidates and PE doesn't have significant influence on it.However,there is a negative correlation between PE and the abnormal levels of discretionary expenses(AB_DISEXP)at 1%significant level.Long-term PE which is positive correlated to AB_DISEXP but is negative correlated to REM shows its powerful effection on corporate governance of IPO enterprises.B. After IPO,there are continuous earnings management in enterprises.PE does not correlate to DA and REM.However,Long-term PE continuously has its effective influence on reducing REM of IPO enterprises.While the reputation of PE is also helping to reduce the AB_DISEXP as like long-term PE does.Comparing to other types PE,State-owned PE significantly decreasing AB_DISEXP shows its power on increasing REM of the enterprises.C. The relationship between DA and REM of GEM board enterprises is complemented rather than substituted.It is to say that IPO enterprise intends to apply both of DA and REM at the same time and does not replace one by the other.D. Before the restricted stock trade period is due,there is stock market wealth effect in most of GEMs enterprises.The CARs are generally negative and PE,multiple unrestricting stocks' selling and Return on Assets(ROA)are all significant correlated to CARs at the same time.E. The restricted stock trading of PE made the quality of enterprises earnings worse.The result of analysis of ERC showed that the quality of earnings of GEMs board is low especially when there is PE investment in individual enterprise.