Research On The Relation Between Senior Managers’Increasing And Reducing Holding And Listed Companies’Earnings Management

The separation of two rights along with the modern enterprise system results in principal-agent problem. Equity incentive is regarded as one of the effective ways to solve principal-agent problem, which has been developing for many years in China. However, the phenomenon of listed company senior managers massively increasing and reducing holding has been repeatedly appearing in Chinese capital market in the recent years. The large amount of related market value and high frequency draw great attention. According to the self-profit theory, the ultimate purpose of senior managers’increase and reduction of holding is to gain personal interests. Listed company senior managers’ status has particularity, because they control listed companies’operating decisions directly, and influence listed companies’performance and stock price. Therefore, senior managers have incentive to get more personal interests and ability of manipulating stock price at the same time during increase and reduction of holding. Senior managers are very likely to manage earnings to obtain more interest in increase and reduction of holding. As senior managers’increasing and reducing holding transmit strong signals to capital market, if they conduct earnings management in increasing and reducing holding, it would not only disturb market order, but also hurt investors’ confidence.With regard to the relation of senior managers’ increasing and reducing holding and earnings management, there are little related literatures. This article researches this issue from the following three aspects:1, whether there is earnings management during senior managers’increasing and reducing holding;2, are the amount of senior managers’increasing and reducing holding and earnings management positively correlated;3, which are the incentives of earnings management during senior managers’ increasing and reducing holding.First, through literature review, this article proposes that there is negative earnings management in senior managers’increase of holding and positive earnings management in senior managers’ reduction of holding, and the market value of increasing and reducing holding is positively correlated to the degree of earnings management. Then, this article poses related hypotheses according to the analyzing on incentives of senior managers’increasing and reducing holding. This article adopts descriptive analysis, correlation analysis, non-parametric test and multiple linear regression in empirical analysis. This article chooses the A-share listed companies with senior managers’ increase and reduction of holding from2008to2012as research sample, and the A-share listed companies without senior managers’increase and reduction of holding as contrast sample. This article measures the degree of earnings management in two ways——accruals earnings management and real earnings management.According to the empirical analysis, this article discovers that there is positive accruals earnings management in the proceeding period of senior managers’ reducing holding, and accruals earnings management and senior managers’ reduction change in the same direction; there is higher cost of goods sold in the proceeding period of senior managers’ increasing holding to lower the profit and lower cost of goods sold in the proceeding period of senior managers’reducing holding to increase the profit, and the market value of senior managers’ increasing and reducing holding and accruals earnings management change in the same direction; in order to avoid earnings management being found or too large, abnormal discretionary expenses are contrary. This article finds no evidence on there is accruals earnings management or real earnings management which uses abnormal cash flow when senior managers’increasing holding. In the research on the incentives of senior managers’ increasing and reducing holding, this article finds out that the incentives of accruals earnings management is obviously different from that of real earnings management. Incentive to conduct accruals earnings management is positively affected by high ownership concentration and short listed history, and negatively affected when the first majority shareholder is state owned. On the other hand, real earnings management is conducted through operating activities and combined with the specific situations, so the incentives of real earnings management are comprehensive, complicated and diverse.