Analysis On The Administrative Expense Of IPO Firms On Growth Enterprises Market

It has been2years and a half since the first stock was issued on the GrowthEnterprises Market in China. The high rate of income deficiency has drawn light onthe problem of earnings management during the IPO process. Companiesthat arepublic on the Growth Enterprises Market are generally smaller and younger, and theshort-term incentives of the entrepreneurjoining millionaire club or the exit of venturecapitalist are strong. What’s more, companies on the Growth Enterprises Market arecentered in High-tech industries, where both R&D expenses and business risk arehigher.Regulators are concerned about the issueof strengthening the supervision andinformation disclosure of the GEM companies which is of big interests ofinvestors.January6,2012, the China Securities Regulatory Commission issued the2011revision of the content and format of the annual report of companies listed onGEM standards and open for comments, showing the importance of this issue.The administrative expense is asubject of an income statement, including theamortization of intangible assets, long-term prepaid expenses, maintenance, researchand development expenses, board fees, office expenses and wages and benefitsattributable to the management, fixed asset depreciation.It is made up by both accrualearnings management like asset amortization andreal activity earnings managementlike R&D expenses ormaintenance fees. Data shows that in2010, the drag of theadministrative expenses for total profit and net profit reaches59.25%and75.23%for2129listed companies in Shanghai and Shenzhen stock exchange market.The high risk of investment and severe information asymmetry phenomenonduring the IPO process of GEM companies give me the inspireto examine theperformance and the earnings management of IPO companies of GEM. Whether thesubject of administrative expense is used for and reflects earnings management?What’s the relationshipbetweenadministrative expenseearnings management andperformance? This article innovative employs a model for discretionary administrativeexpense and finds out that GEM companies manage earnings positively beforelisting through the method of lowing administrative expense. Anotherconclusion is that the lower the ROA before listing, the higher the probabilitythat a company manage earnings throughadministrative expense.