Earnings Management And Market Discounts Of Private Equity Placements

Since Measures for the Administration of the Issuance of Securities by List companies was carried out, private equity placement has now reached the top in ways of equity financing among listed companies in China. Apart from priorities of it, private placements are often be claimed to have caused unfair wealth distribution between old shareholders and the new, or large shareholders and the others. To control the wealth transfer, market discounts of private placements play a key role, and it’s inclined to think that earnings management be used to manipulate the discount. Results of this study show that premium percentages of private placements were greatly affected by upward earnings management; and discount percentages of private placements showed no significant relation with upward earnings management. Therefore, earnings management benefits the old shareholders. Results also show that listed companies intended to bring upward reported earnings in the yare during and after the placement, which implies that final victims of private placement are small shareholders.The paper is constituted of five chapters:Chapter1:Introduction. This section investigates the current equity financing market of listed companies in China, and gives a brief description of researching method and article construction.Chapter2:Literature review. This chapter is divided into three parts, focus on studies of market discount issues of private placement, earnings management theories and measuring approaches, and empirical results of earnings management in private placement.Chapter3:Research design. Based on previous studies and practices, the paper brings forward three major hypotheses:whether earnings management exists in private placements; whether earnings management affected placement discounts on the whole; how does upward or downward earnings management work on placement discounts separately. Descriptive statistics, one-sample T statistics, and liner regression are used to test the hypotheses.Chapter4:Empirical results. T statistics show that there were sinificantly positive earnings management during and after the private placement. Liner regression on all samples implies there is significant negative relation between discretional accruals and private discounts. Further liner regression on grouped samples reveal significantly positive relationship between placement premium and upward earnings management, but downward earnings management affected little on private discount.Chapter5:Major conclusions and suggestions. Earnings management benefits the old shareholders. Nevertheless, the new investors became influential after private equity placement, and pressures were put on listed companies to inflate reported profit,. Thus final victims of private placement were small shareholders.