Private Placement, Big Shareholders’ Control And Earnings Management

Earnings management has always been a topic that is extensively discussed in accounting academics and earnings management before equity refinancing is an important part of earnings management research. Previous studies have shown that public equity refinancing companies are associated with earnings management in order to fulfill the qualifications requirements of public equity refinancing or affect share prices. Since2006, the private placement has become the first choice of equity refinancing companies because of its own advantages. Whether or not will listed companies engage in earnings management before the private placement? This paper examines earnings management of listed companies before the private placement under big shareholders’ control, reveals the effect of big shareholders’ control on earnings management, and adds real earnings management in the scope of study. The choice preference between accrual-based earnings management and real earnings management of listed companies before the private placement has also been studied.On one hand, the private placement is closely related to the interests of big shareholders; on the other hand, the ownership structure in China (One share dominates exclusively) determines the "What one says goes" phenomenon. Thus big shareholders are motivated to manage earnings in order to encroach on the interests of small shareholders. The issue objects of the private placement in practice include the shareholders of the company and institutional investors. Listed companies may manage earnings in different directions according to different issue objects. When the issue object is big shareholders and its related party, the method of payment is always asset subscription, and listed companies have an incentive for downward earnings management, because lower earnings will lead to falls of share prices and big shareholders can exchange for more shares with the same assets. When the issue object is institutional investors, the method of payment is always cash subscription, and listed companies have an incentive for upward earnings management, because better performance will help to increase share prices, and the companies will raise more capital which means the big shareholders will get more wealth accumulation. At the same time, the share proportion of big shareholders is closely related to the ability and size of benefits getting from earnings management activities, so the degree of earnings management may be affected by the share proportion of big shareholders.Listed companies manage earnings through both accruals and real activities. Overseas studies have found that accrual-based earnings management is easier to be identified by regulators and accounting firms, so companies will choose real earnings management as the substitute mode. However, the auditing quality and basic environment of legal protection of investors in our country are fairly weak and the cost of both accrual-based and real earnings management are relatively low, so listed companies are likely to use two ways at the same time in order to achieve the best result. In other words, there may be a positive relationship between these two ways.According to the above analysis, the study contents of this paper are as follows:Chapter one is introduction. This part first introduces the research background and objectives, then clarifies the research methods and constructs the research structure. Finally, this part introduces the contribution of this research from both theoretical and practical aspects.Chapter two is literature review. This part sorts out and analyzes relevant literature from three aspects:equity refinancing&accrual-based earnings management, big shareholders’ control&accrual-based earnings management, and real earnings management.Chapter three is institutional background and basic theory. This part first reviews the history of China’s private placement institution and introduces the relevant provisions of the private placement, then finds the basic theory of this research from principal-agent theory, asymmetric information theory and the informativeness of accounting earning theory.Chapter four is research design. This part presents three hypotheses and choose331A-Share listed companies as the research objects which implemented the private placement from2006to2011, then clarifies the measure methods of earnings management degree and establishes the research models.Chapter five is the results and analysis of empirical research. This part is divided into three sections:the distribution of time series of earnings management before the private placement; the multiple regression test of private placement, big shareholders’ control and earnings management; the univariate correlation test of accrual-based earnings management and real earnings management. The three hypotheses of this paper are all confirmed by the above tests.Chapter six is conclusions and implications. This part first sums up the research conclusions of this paper, then puts forward three targeted suggestions. Finally, this part analyzes the inadequacies of the research and forecasts future research directions.This paper comes to the following conclusions:Firstly, listed companies will use accrual-based and real earnings management before the private placement and these activities are most obvious in the year prior to the private placement.Secondly, the direction of earnings management before the private placement is related to the issue object. Listed companies will use downward earnings management when the issue object is big shareholders, and use upward earnings management when the issue object is institutional investors. This result suggests that listed companies transfer benefits to big shareholders by choosing earnings management’s direction before the private placement.Thirdly, the share proportion of big shareholders has a positive influence on the degree of earnings management. That is, the higher the share proportion of big shareholders, the higher the degree of earnings management. This result suggests the phenomenon of big shareholders encroaching on the interests of small shareholders before the private placement.Fourthly, listed companies manage earnings through both accruals and real activities before the private placement, and there is a positive linkage between these two ways. That is, the higher the degree of accrual-based earnings management, the higher the degree of real earnings management.The contributions of this paper are as follows:(1) This paper adds real earnings management, how to manage and the relationship between accrual-based and real earnings management into research, which enriches the domestic literature about real earnings management, and also helps to improve the emphasis on real earnings management.(2) This paper presents evidence of big shareholders’ expropriation of small shareholders’ interests before the private placement. It reveals the motivations of earnings management in China’s listed companies before the private placement from a deeper level.(3) This paper studies the earnings management behavior of listed companies before the private placement from the aspect of big shareholders’ control, which has a certain significance to strengthen external supervision&management and improve corporate governance.The inadequacies of this paper are as follows:(1) This paper only studies three ways of real earnings management-manipulation of sales, cost and production.. However, listed companies may manage earnings through real activities in other ways such as asset sales or related transactions and this paper does not include these ways.(2) This paper only studies two types of the private placement-big shareholders type (issue object is big shareholders and its related parties only) and institutional investors type (issue object is institutional investors only), and it does not make valid conclusions to hybrid type (issue object includes both big shareholders and institutional investors).