Study Of The Effect Of Profit Guarantees In Private Placements On Earnings Management

The private placement has become a refinancing channel of significant importance for listed companies since CSRC(China Securities Regulatory Commission)promulgated Measures for the Administration of the Issurance of Securities by Listed Companies in 2006.The profit guarantee in the private placment is a sign for market principles.It makes contributions to alleviating information asymmetry as well as protecting the interests of small and medium investors,by holding back malicious pricing and promoting fair transactions.However,every coin has two sides.Profit guarantees also function as the foothold for artificially high transaction prices in the other way.Moreover,they may become the implements for market value manipulation and the motivation for earnings management.High profit guarantees are common in Chinese capital markets nowadays,while the average achievement rates concentrate near the critical point(100%).Reality has seen postguarantee performance change frequently happening,which denotes an increase in earnings management during periods of profit guarantees.This paper employs both theoretical analysis and empirical research to demonstrate that listed companies have conducted upward earnings management due to profit guarantees in private placements.Based on the data of profit guarantees during 2013-2017,which are manually collected by the author,the empirical evidence has given its conclusion.Among the three earnings management methods,which consist of accruals earnings management,real earnings management and classification shifting earnings management,listed companies are in favor of the last one.Further research shows that classification shifting earnings management tends to be more severe when those guarantees aren't realized to reduce the related compensation and the negative effects on consolidated statements,rather than when they're achieved.It has also been found that state owned enterprises tend to conduct less classification shifting earnings management than other enterprises during periods of profit guarantees.What's more,classification shifting earnings management tends to be stronger during periods of profit guarantees when the president is the CEO at the same time,with other conditions unchanged.All these judgments have passed the robustness tests.At present,a great number of academic researches have paid attention to private placements.But the literature about profit guarantees in private placements is relatively rare.This paper enriches this theoretical field to some extent by studying the effect of profit guarantees in private placements on earnings management.In the mean time,it serves as a reference for later academic researches,especially for those on classification shifting earnings management.The author believes that profit guarantees in private placements will be more and more common with financial regulation being strengthening.Disclosures of the specific terms,completion situations,restraint measures,uncompleted reasons or compensation plans related to profit guarantees will attract more and more attention from regulatory authorities,transaction parties and intermediary organizations.This paper aims to offer help on adopting a dialectical perspective towards profit guarantees.By completing the empirical research on the relationship between profit guarantees in private placements and earnings management,references are expected to be provided for regulatory authorities to guide listed companies into improving the the quality of accounting information.In addition,the author hopes people may find this paper useful in protecting the interests of small and medium investors and further standardizing Chinese capital markets.