Research On Earnings Management Of IPO Companies Based On GEM Reform

The pharmaceutical industry is an important component of China’s national economy.In recent years,China’s biopharmaceutical industry has continued to develop and is known as a "sunrise industry that will never decline.".Currently,the policy environment of the domestic biopharmaceutical industry continues to improve.The State Council and the National Drug Administration have successively issued a number of policies that have provided many practical benefits for biopharmaceutical enterprises,prompting the biopharmaceutical industry to continuously move towards standardization,centralization,innovation,and internationalization.Compared to the main board in the securities issuance market,the registered IPO(initial public offering)system has a higher degree of marketization.Previous research at home and abroad has generally shown that the improvement of the marketization process of the securities issuance system can effectively constrain the earnings management behavior of IPO companies.Following the implementation of the registration system for the initial issuance and listing of the Science and Technology Innovation Board,on August 24,2020,the registration system was also implemented for the listing of enterprises on the Growth Enterprise Board.There are many differences in the listing conditions between the registration system and the previous implementation of the approval system and the approval system.The registration system cancels mandatory requirements such as profit growth,and only conducts formal review of registration documents without making substantive judgments.Based on this institutional background,this article uses contract theory,principal-agent theory,and information asymmetry theory as theoretical foundations to study the earnings management behavior of case companies before and after the GEM reform-Kanghua Biology and Biocause Heilen Pharm,and provide relevant inspiration for other companies to be listed,national regulatory authorities,and investors.The article mainly uses the literature research method,case analysis method,and comparative analysis method.The article first introduces the background and significance of the research,and combs the existing domestic and foreign relevant literature from two logical chains: the motivation,means,economic consequences of IPO earnings management,and the impact of securities market systems on earnings management behavior.During the case study,the article selected Kanghua Biotechnology,a pharmaceutical company listed on the GEM before the reform in 2020,and Biocause Heilen Pharm,a pharmaceutical company registered on the GEM in 2021,to identify and analyze their earnings management behavior by establishing an accrual earnings management model and a real earnings management model based on their financial reports and other data,and compared them with other pharmaceutical industries listed on the GEM,It is found that there may be some degree of earnings management behavior during the IPO process,among which the real earnings management behavior is relatively hidden and difficult to identify.Based on the prospectus and annual reports of Biocause Heilen Pharm and Kanghua Biotechnology,the article analyzes their revenue in the first three years of their IPO and finds that under the GEM reform,Biocause Heilen Pharm has less incentive for earnings management,while Kanghua Biotechnology may have an incentive to increase the issuance price through high profits.Based on this,the article analyzes the earnings management methods of Biocause Heilen Pharm and Kanghua Biotechnology from the financial statement level,and finds that Kanghua Biotechnology may have implemented earnings management behavior in terms of revenue recognition and cash flow.Kanghua Biotechnology also has the suspicion of using key customers to adjust profits.Next,the article analyzes the economic consequences of earnings management in corporate IPOs from the aspects of securities market performance and financial statements.In the short term,the stock price of Kanghua Biology has risen continuously since its issuance,bringing it significant economic benefits.At the level of financial statements,analysis and evaluation are mainly conducted from four perspectives: profitability,operational ability,solvency,and growth ability.After the IPO,Biocause Heilen Pharm’s profitability and operating ability have weakened,and there may be certain operational risks.After the IPO,Kanghua Biology’s operating capacity and short-term debt repayment ability have decreased,which may be the reason why Kanghua Biology conducted earnings management before the IPO.Finally,the research conclusion is drawn: GEM reform will reduce the degree of earnings management,but it can also make accounting information more robust.IPO earnings management can indeed bring short-term benefits to enterprises.However,if earnings management is used improperly or excessively,it may cause economic losses to enterprises and increase the production and operation risks of enterprises and investors.Therefore,this article puts forward suggestions on strengthening IPO earnings management from three levels,namely,IPO companies,investors,and regulatory authorities.First,for prospective IPO companies,real earnings management should be carefully used;To comply with relevant laws and regulations,strengthen corporate governance and internal control,reduce earnings management behavior,and improve operational efficiency and core competitiveness;We should abide by the information disclosure system,improve the transparency of information disclosure,and improve the disclosure of key IPO projects and off balance sheet items.Secondly,for investors,the ability to identify earnings management behaviors should be improved;We should focus on comprehensive analysis of IPO companies and rational investment.Third,for regulatory authorities,it is necessary to strengthen the supervision of IPO earnings management behavior,and introduce earnings management metrics into corporate financial statements to protect investors’ rights and interests;We should strengthen the construction of the IPO system and accelerate the promotion of the comprehensive registration system;We should improve the disclosure of accounting information,strengthen the review of accounting information,improve the audit quality of certified public accountants,and give full play to the governance role of external audit.Compared with foreign registration systems,China’s registration system has a relatively short development time,and relevant research is still relatively lacking.The research in this article can provide valuable reference for the research on the earnings management behavior of pharmaceutical companies’ IPO under the GEM registration system.