An Empirical Study Of Earnings Management Based On Equity Refinancing Of Chinese Listed Companies

Capital demand is bound to increase with the business expanding of listed companies. Refinancing is one of the important ways to obtain follow-on capital for listed companies after the IPO. In recent years,equity refinancing has played a more important role than the IPO in the Chinese capital market. In order to protect the interests of investors, the security authorities have provided strict restrictions on the qualifications of equity refinancing. To some extent, these restrictions have encouraged listed companies to improve net income with earnings management and achieve the policy requirement. At the same time, what has been concerned is the earnings performance of listed companies after refinancing. Through refinancing, listed companies have obtained substantial capital to invest in the planned project with the expectation of improving their operating performance. But the fact is far from it.Based on the sample of the listed companies with right issues and seasoned equity offering between 2001 and 2004, this paper discusses the earnings management of the listed companies in equity refinancing by using Healy model, the modified Jones-model and the distribution of Earnings after Management. Meanwhile investigating how the earnings management before refinancing infliuences earnings performance after refinancing. The findings show that the listed companies have a high degree of upward earnings management. With the purpose of acquiring higher outcome and the qualifications of refinancing, both the rights issuers and the seasoned equity issuers achieve the earnings management which is manifested as the obviously-higher discretionary accruals before the refinancing compared with that of the fellow companies. The stock market's short-term reaction to refinancing is negative, which is demonstrated by the negative cumulative abnormal return(CAR) after the refinancing announcement. Through regression analysis, the findings indicate that positive correlation exits between discretionary accruals before the refinancing and CAR after the refinancing announcement, which shows that investors can not detect earnings management of the listed companies. After the refinancing, an obvious poor earnings performance of listed companies can be indicated by distinct decline in return on equity (ROE). It can be observed that negative correlation exits between earnings management prior to the refinancing and poor earnings performance afterwards through correlation analysis and regression analysis.