Affecting Factors Of Initial Public Offerings And Economic Consequences

In November 30,2013, Chinese Securities Supervision and Management Committee issued a proposal on advancing Initial Public Offerings System Reform, asking issuers to improve the quality of disclosed information, strengthening the legal responsibility of sponsor agencies, accounting firms, law firms and other securities service institutions and their personnel in the stock issuance process, promoting fair and reasonable price, limiting the issuers with high issuing price, preventing investors to push new stocks price blindly, and constraining opportunistic behavior of new issues.Accounting conservatism can be defined as accountants’tendency to require a higher degree of verification to recognize good news as gains than to recognize bad news as losses. Accounting conservatism is an historical accounting principle which influences accounting confirmation and accounting measurement in accounting practice, and conservative earnings is treated as high quality of accounting information. As Chinese Accounting Standards reaches the overall convergence with International Accounting Standards, conservatism principle is slowly strengthened in Chinese Accounting Reforms, and many empirical research shows that the degree of conservatism in reported accounting earnings of listed companies is closely related to conservatism in accounting standards. Currently, Chinese Securities Regulation Commission is exploring the registration system of stock issues, which emphasizes the quality of disclosed information. The prospectus of issuing companies is the important source of the investors, and potential investors make decisions based on the audited financial statements. Many empirical research finds out that most firms manage earnings upwards before issuing stocks, and some doubts conservative earnings results from earnings management, then what happens during the process of initial public offering? Controlling holder, liabilities structure and auditor choice affect accounting conservatism of listed companies, but few review discuss these factors based on initial public offerings, which is a meaningful problem. A lot of review suggest that there exists serous information asymmetry between issuers and investors that super-return of first-day is popular in global securities. Accounting conservatism effectively mitigate information asymmetry, then can accounting conservatism of the issuers reduce first-day returns?Based on the issuers during approval system of initial public offerings and empirical accounting method, this paper examines earnings conservatism during the process of initial public offerings, analyzes the three factors, such as the controlling holder, debt structure and auditor choice, how to affect accounting conservatism of IPOs, and analyzes the influence of conservatism on first-day returns. The conclusions are reported as follows. Firstly, the profits in prospectus disclosed by IPOs are conservative, but accounting conservatism is not significantly improved excluding extraordinary profit after successfully listed. Secondly, the controlling holders influence accounting conservatism, and earnings conservatism of non-state-owned IPOs is higher than that of state-owned IPOs. The more of total debt or current liability of IPOs is, the higher earnings conservatism of IPOs is. Long debt of IPOs does not asks for earnings conservatism because of its less amount. The earnings conservatism audited by big-four accounting firms is significantly lower than that audited by non-big-four accounting firms, but there is no difference in earnings conservatism between IPOs audited by national big-ten accounting firms and non-big-ten accounting firms. Lastly, empirically tests show that there is negative relationship between accounting conservatism and first-day return.The conclusions have much theoretical and practical significance. The paper tests the earnings conservatism of IPOs in the process of initial issuing stocks, which is helpful to understand the relationship between earnings management and earnings conservatism; Examining the nature of controlling holder, debt structure and auditor choice how to affect earnings conservatism of IPOs, provides suggestions to improve accounting information quality; and provides references for the merges of auditing firms encouraged by the Ministry of Finance and Association of Certified Public Accountants through comparing the difference of conservatism audited by big-for or non-big-four, and national big-ten and non-big-ten auditing firms, and finds out that accounting conservatism of IPOs may reduce the first-day return, which is meaningful for issuing system reform promoted by Chinese Securities Regulation Commission at present.