Corporate Governance,Real Earnings Management And Post-IPO Performance

This paper focuses on real earnings management(REM)made by family firms during their initial public offering(IPO).There are three research purposes:to investigate the existence of REM during IPO,its impact on future performance,and how it is affected by corporate governance within family firms.To explore these subjects,this paper review studies concerning this topic,including the definition,methods and motivations of earnings management,and its influence on future financial performance.Most of the studies used accrual models based on Jones(1991)to identify earnings management.It is not until recently that several studies began to identify REM—earnings management with real activities manipulation.Based on the status quo of Chinese family firms and IPO regulations in China,this paper analyzed the determinants and consequences of REM during IPO.First.REM is less detectable because it is a manipulation of real activities by managers.To satisfy the profitability required by regulators and investors,managers are likely to make upward earnings management by manipulating real operating activities.This paper believe that on average,family firms conducted REM during IPO,and that REM pre-IPO is greater than that in the post-IPO period.Second,managers tend to reduce discretionary expenditures,manipulate sales,or overproduce to manage earnings upward in the short term.These manipulations,however,will have a strong negative impact on firm performance in the long run.For example.if R&D expenses is reduced,innovation,which keeps the business a competitive edge in the future-will be hampered,and eventually firms without innovation will be outperformed by their competitors.Therefore this paper argue that REM during IPO will have a profound negative impact on future performance.Third,managing earnings for capital market incentives is a highly speculative decision.For some family firms.managing positions are taken by family members,which combines the interests of family and the firm very closely.To protect their firm as a family legacy,family managers tend to be more prudent when making decisions.They are less likely to conduct REM since it will hurt the prosperity of their firm in the long run.Additionally,most Chinese family firms are now managed by their founders,who value the long-term development of their firms.Hence the next two hypotheses are:family chairman/family CEO will conduct less REM.However,if the firm is in a complex,multi-layered ownership structure,then there is a probability that its going public is not purely to raise capital,but to become a tunneling opportunity to family.And the last hypothesis is that REM is positively related to the complexity of ownership structure.Next,Using financial data and family data of family firms whose IPO is between the year 2008 and 2010,and following the REM model put forward by Roychowdhury(2006),this paper calculates a proxy to measure REM.The proxy passes the t test which indicates the existence of REM during IPO.Last,regression models are built to verify the last four hypotheses.The originality of this paper lies in the following aspects:first,most studies use accrual models to measure earnings management,few investigate REM during IPO,and even fewer investigates the influence of corporate governance in family firms on REM.Second,this study tests the year-on-year trend of REM,which is a niche unexplored in theory.