The Research Of The Correlation Between Pre-IPO Earnings Management And Underpricing

With the development of the security market, severe IPO underpricing is always a vexed question in our courtry. At the same time, a series of earnings management and financial packaging cases of public companies have been exposed, it pushes the IPO market to a very dangerous position where there is no credibility at all. The incentive of earnings management and the quality of accounting information affect the fairness and the efficiency of the security market, so dose the pre-IPO earnings management correlated with the IPO underpricing that infringe on the market's efficacy? And could the pre-IPO earnings management explain the severe IPO underpricing phenomenon?The paper uses the method that ties with the standard analysis and the empirical analysis to study the relationship between the pre-IPO earnings management and underpricing. In this study, we review and commend some existing researches, and analyze the theory origin, precondition and measuring models of earnings management. Then according to the institutional background of A-share stock market and the feature of investors, we analyze deeply the immanent correlation between the pre-IPO earnings management and underpricing. After the theoretical analysis, we adopt the Basic Jones Model and the Modified Jones Model to detect earnings management. Based on the data of initial public offerings (IPO) that issued from year 2000 to 2004, we study the relation between the pre-IPO earnings management and offer price, after-market price and the first-day price changes of IPOs. The result shows that there is severe underpricing phenomenon in Chinese IPOs, earnings management occurs universally in IPOs and the first-day price changes has significant positive correlation with pre-IPO earnings management. Therefore, we draw a conclusion. Because of the institutional limitation of issue market, the initial offer price is mostly dependent on pre-IPO reported earnings, the investors in the secondary market over-react to IPOs financial statements accompany with the speculative market, and the stock price can not indicate the true value of these firms, then all these make for the underpricing phenomenon. Finally, we put forward a series of corresponding suggestions on policies and institutions that will change the present situation of IPO market. The pre-IPO earnings management will affect the extent of underpricing, so we should position accurately the security market's function and effect, reform the initial offerings examination institution, develop the law system of public companies'earnings reporting and financing, build up the supervision to the CPA agency and high-level bureaucracy. These measures will...