Earning Management Empirical Study Based On New Share Issue In China

Earnings management occurs when manager use judgment in financial reporting and in structuring transactions to alter financial reports ,to either mislead some stakeholders about the underlying economic performance of the economy ,or to influence contractual outcomes that depend on reported accounting numbers. As an important issue in financial reporting , earnings management have been attracting the eyes of accounting researchers since 1980's.Many motivations have been put forward in the literature. These motivations include remuneration, compliance with debt covenants clause, political cost, taxes and initial public offering. Influenced by the market, new share issue has become the most important measure that listed companies absorb new capital from market in China. To ensure quality, the regulatory bodies set a series of provisos for new share issue. Earnings play an important role in these provisos. This motivates the listed companies to increase their report earnings. Our hypothesis in this essay is thatlisted companies will increase total accruals in the period tï¹£1,t0 and t1,while decrease in the period t2.Net income consists of cash flows from operations and total accruals that can be divided into discretionary and non- discretionary accruals .How to derive discretionary accruals from earnings is the key in detecting earning management. It is not possible to observe earnings management directly. Therefore, prior research has used a number of accounting accruals measures to detect earning management. These measures include random walk model, and so on. Of all the above models, it is only the Jones and modified- Jones models who introduce the change of environment to estimation of non- discretionary accruals, and who derive effectively discretionary part from total accruals. using a sample of 104 non-financial companies from Shanghai Stock Exchange, we found empirical evidence showing the link between new share issue and earnings management. Our results indicate that entrepreneurs may seek to increase total accruals, temporarily deceiving regulatory bodies by opportunistically manipulating earnings through accruals management surrounding the new share issue.