Earnings Management In The Reduction Of Original Non-tradable Shares

At the early stage of China's capital market's development, considering such problems as keeping and increasing the value of state-owned assets and state-controlled ownership, state-owned shares and legal person shares were not allowed in stock exchange. China's capital market has been prevented from well development for a long time mainly because of this systematic defect. Thus non-tradable shares have to be decreased in order to ensure the progress of China's capital market. However, shareholders of non-tradable shares are likely to make use of ownership to manipulate market and encroach upon rights of minority shareholders.This article focuses on earnings management after the non-tradable share reform, investigating whether majority shareholders will manage earnings for their own rights during the reduction of original non-tradable shares, so as to provide evidence for research on whether corporation take earning management by using their own advantages to raise stock price during selling their non-tradable shares.The article first reviewed the relevant literature about non-tradable share reform and reduction of original non-tradable shares, which confirmed the existence of earnings management in China's capital market with meeting the reduction require for the purpose. And then it theoretically analyzed the existence and motivation as well as influencing factors on earnings management in the process of reducing original non-tradable shares, and put forward the relevant assumptions. In research methods, it mainly used empirical research way. Based on predecessors'relevant theoretical research, this paper followed the study model of "theory-hypothesis-testing". The main statistical methods used in the paper including:descriptive statistics analysis, correlation analysis, independent samples T test and linear regression, and so on.Through the empirical study, this paper finds that there is earnings management in the sample firms during the year which reduction happened compared with industry average.This shows that, non-tradable shareholders can use the control right to encroach on the minority shareholders during the entire circulatio. During the research of motivation of earnings management, this paper finds that the motivation of fluidity and speculative motivation will lead to the earnings management, the greater of the motivation, the more obvious the earnings management. During the research of the influencing factor of earnings management, the empirical study shows that too much reduction of shares in one year or too high market value will lead to the earnings management, it also shows that the supervisory department should set out measures to control the shares reduced during one year. During the research of how ownership concentration affect the earnings management, this paper finds that there is a "U" shaped corresponding relation between earning management and ownership concentration, which proved that when equity is too centralized or overly dispersed, the surplus quality would be reduced. When the top five shareholders' shareholding ratio is about 45%, the surplus quality is the highest. With the decrease of equity centralization, the earnings management level of the company is decreasing significantly, indicating the previous ownership concentration was generally too high, and appropriate reduction can improve the company's earnings quality. During the research of inhibiting factors of earnings management, this paper believes that the appropriate balances of outsider blockholders can restrain earnings management. However, the separation of chairman and general manager can not significantly inhibit the earnings management.