Controlling Shareholder Pledge,Auditor Industry Expertise And Real Earnings Management

In recent years,equity pledge as a new financing method has developed rapidly in mainland China,and the controlling shareholder pledge has become a common phenomenon in China’s capital market.Equity pledge has the advantages of fast financing and large financing scale,but equity pledge financing is not without risk for controlling shareholders.When the stock price of the pledged stock falls to the closing line or the warning line,the controlling shareholder faces the risk of additional guarantees or even forced liquidation,which leads to the transfer of control rights.In the face of the risk of transfer of control rights,the controlling shareholder who has carried out the equity pledge has a strong incentive to require the company to manage earnings in order to stabilize the stock price.Due to the development of the capital market environment and the regulatory environment,accrued earnings management has been unable to meet the needs of managers,and more and more companies tend to manage earnings through real economic activities.So in terms of real earnings management,what is the degree of influence of the controlling shareholder’s equity pledge? After distinguishing the risk of transfer of control rights,what is the relationship between the two,the problem to be studied in this paper.On the one hand,the equity pledge of the controlling shareholder increases the auditor’s business risk.On the other hand,the real earnings management activity after the controlling shareholder’s equity pledge will increase the audit risk of the auditor.Auditors with industry expertise can grasp the trading process,special accounting policies,business characteristics,government policies and other knowledge of the industry in which the customer is located,and reduce the degree of information asymmetry between the company and the company,so as to more accurately identify the company’s real earnings management.Then,whether an auditor with higher industry expertise can constrain the real earnings management activities of the controlling shareholder’s equity pledge to a certain extent.This article will study this issue.The article uses a combination of normative research and empirical research.On the basis of systematically combing the relevant existing research results,the paper first analyzes the controlling shareholder’s equity pledge,the auditor’s industry expertise and the theory of real earnings management,and the mechanism of the relationship between the three,and proposes corresponding research hypotheses;Then,using empirical research methods,the data of A-share listed companies from 2007 to 2017 were selected to examine the relationship between controlling shareholder pledge,auditor industry expertise and real earnings management.The study finds that there is a positive correlation between the controlling shareholder pledge and the real earnings management activities,which is more obvious when the risk of transfer of control is higher;The auditor industry expertise has a depressing effect on the relationship between controlling shareholder pledge and real earnings management activities.Further research found that only when the equity pledge rate reaches 25% or more,will the company’s real earnings management behavior be significantly stimulated;When the company implements the equity pledge,when the auditor’s industry expertise reaches 3.2% or more,it has the effect of significantly reducing the company’s real earnings management level.To this end,the relevant departments should strengthen the disclosure of information on the controlling shareholder’s equity pledge,and the pledgee such as banks should strengthen the awareness of equity pledge risk.Listed companies should strengthen the management of real earnings management activities from internal governance and external audit.