Earnings Management During ST Reid Performance Commitment Period Behavioral Research

As China’s capital market has entered a period of high incidence of mergers and acquisitions,performance commitments are increasingly appearing in the public’s view.The initial purpose of performance commitment is to protect the interests of small and medium investors.With the changing market environment,performance commitment gradually exposes risks,and the negative effects become more prominent.In order to achieve high performance commitment,enterprises will choose earnings management with great probability,so the phenomenon of accurate performance commitment reaching the standard frequently appears.The consequent consequence is that the goodwill will be greatly impaired and the stock price of the enterprise will plummet after the performance commitment is finished.Enterprises can whitewash their business performance by means of earnings management,which leads to the lack of authenticity and reliability of the financial information obtained by the majority of small and medium-sized investors,thus making wrong investment decisions,which is not conducive to the good development of market economic order,resulting in serious damage to the interests of the majority of small and medium-sized investors.Based on the above background,it is of profound significance to study the earnings management behavior of enterprises during the performance commitment period in the process of mergers and acquisitions.The case company selected in this paper is ST Reid.Starting from the background and research significance of this topic,this paper puts forward the research ideas and methods,as well as possible innovations and shortcomings by combing and summarizing the domestic and foreign literature on performance commitment and earnings management.Then,it introduces the relationship between performance commitment and earnings management,and the theoretical basis of this paper: information asymmetry theory,signal transmission theory and contract theory.After that,it introduces the specific cases of ST Reid’s backdoor listing,including the performance commitment plan of this merger and the completion of ST Reid’s performance commitment.ST Reid accurately achieved the performance commitment target in 2015-2016,but its performance suddenly dropped rapidly in the third year of performance commitment,and its performance dropped sharply in 2018,thus raising the question of earnings management during the performance commitment period.Then it analyzes the motivation of ST Reid’s earnings management during theperformance commitment period,and then tests whether ST Reid has earnings management behavior by using the modified Jones model and the total accrued profit model.The test results show that ST Reid does have positive earnings management during the performance commitment period.The analysis shows that ST Reid manages earnings by using related party transactions,manipulating expenses to increase profits,using government subsidies,purchasing assets at a premium,and using loose credit policies.Finally,the economic consequences caused by earnings management are analyzed from two aspects: market reaction and financial performance.Although earnings management can make ST Reid realize short-term profit,it affects the long-term operating ability of ST Reid and damages the interests of minority shareholders.Based on the above analysis and conclusions,this paper puts forward the following suggestions from three levels: enterprise,investor and supervision:carefully assess market risks,determine reasonable commitment targets,strengthen internal control of enterprises,keep investors rational,optimize performance commitment system,strengthen information disclosure,and increase supervision and punishment of earnings management behavior.Through a detailed study and analysis of specific cases,I hope to make some contributions to the research on performance commitment and earnings management in China.