The New Accounting Standards And Earnings Management Of IPO Firms

Extant literature abounds with research findings on earnings management surrounding a firm's initial public offering.On 15 February 2006,the Ministry of Finance of the People's Republic of China formally announced the issuance of the new Accounting Standards for Business Enterprises('ASBEs').The ASBEs become mandatory for listed Chinese enterprises from 1 January 2007.We find that initial public offering firms that apply the ASBEs were associated with lower earnings management.This study examines earnings management before Chinese firms' A-share IPOs during the 2006-2008 period from the Shenzhen Stock Exchange,using the modified Jones model and the discretionary accruals as measurement index.The IPOs are divided into two parts:Sample One is the IPOs in 2006 that applied the old accounting standards,and Sample Two was the IPOs in 2007 and 2008, which applied the new accounting standards.We Further subdivide Sample Two into sub-sample one(2007) and sub-sample two(2008).Firstly,we find that the mean and median of discretionary accruals of Sample One and Sample Two are all significantly positive,indicating that both of the accounting standards have failed to put an end to the earnings management behavior of IPO firms.The mean and median of sub-sample one are significantly positive,while the mean and median of sub-sample two are not significant.Secondly,we compare discretionary accruals of all the samples and the sub-samples in years t-1 and t-2,we find there are no significant differences about the earnings management of the initial public offerings.Thirdly,we test whether there are differences in the degree of earnings management between Sample Two,sub-sample one,sub-sample two and Sample One.We find that in the year t-1,the mean and the median of discretionary accruals of sub-sample one are significantly higher than Sample Two and sub-samples,indicating that the degree of earnings management by IPOs that apply the new accounting standards declined.Finally,in order to clear the new accounting standards on earnings management of IPO companies,we built a regression model by adding some control variables.Regression results show that the new accounting standards are likely to contribute to a decrease in earnings management of the IPO companies.