The Internal Control And The Earnings Management Before Private Placement In Chinese Listed Companies

In May of 2006, China Securities Regulatory Commission issued the Measures for the Administration of Securities Issuance which provides a legal basis for the private placement. There is no requirements regarding earnings for companies. Therefore, it is significant to study the earnings management before the private placement. With the exposure of financial fraud scandal of large multinational corporations such as Enron and Lehman Brothers, regulatory authorities such as government issued a series of regulations and policies in which they are trying their best to improve internal control system. Ministry of Finance of China and other five ministries issued the “Basic Norms of Internal Control” in 2008, which requires listed companies to establish the sound internal control system gradually. Currently, there are much literature shows that internal control can monitor the behavior of management, improve the quality of accounting information and promote the development of enterprises. Therefore, during the progress of the private placement, it is significant to study whether or not the internal control can decrease the earnings management.In this paper, normative analysis is combined with empirical analysis. I select all A-share listed companies which issue new shares by private placement in 2008, 2009 and 2010 as samples to study the motivations and means of earnings management. Meanwhile, I also study the economic effects of internal control during the private placement. This paper also did further analysis about the five elements of internal control, the different property right and different levels of marketization. This study conducts that during the private placement, earnings management is related to the type of private placement. Negative earnings management exists when the controlling shareholders purchase the shares and positive earnings management exists when institutional investors purchase the shares. The internal control of listed companies can decrease the degree of earnings management. What’s more, the conclusions are related with property right, level of marketization and other factors.