Ownership Structure Of Private Listed Companies And IPO Earnings Management

Initial public offer is an important way for enterprises to obtain new capital for development, especially for private enterprises in China which are harder to get debt support from banks. Recently, private enterprises have become the main part of Chinese Initial public offer market. However, since the Chinese SEC adopts the Approval System in IPO process, the information asymmetry is not only between issuers and investors, but also between issuers and regulators. The issuers own the private information about enterprises, but how to convey private information through ownership structure and earnings quality to regulators and investors to get the listing qualification and offering price at minimum cost is an important problem for the issuers.Listing qualification is the prime objective for private enterprises, as the result of the high sink cost which is caused by rent seeking under the Approval System in initial public offer process. Therefore, firstly, I study the information asymmetry between issuers and regulators; I find there is a substitution effect between ownership structure signal and earning quality signal. The share proportion of ultimate owner is significantly negatively related to IPO earnings quality. When share proportion of the ultimate owner is low, the issuers will increase earning quality to make up for the negative signal of ownership structure. I further examine the effect of marketization level on the relationship between ownership structure and earnings quality. I find that private enterprises which are located in areas with low marketization rely more on ownership structure than earnings quality to convey their private information to regulators; there is a stronger substitution effect between ownership structure signal and earnings quality signal. Secondly, in term of the information asymmetry between issuers and investors, I find that investors can distinguish ownership structure signal; the share proportion of ultimate owner is negatively related to IPO underpricing. However, the investors cannot distinguish earning quality signal; I didn’t find evidence showed that improper earning management will increase IPO underpricing.