| March 31,2009 China Securities Regulatory Commission announced the "IPO and listing on the Growth Enterprise Market (GEM) Interim Measures," and would be implemented from 1 May 2009, meaning that after a decade of preparing GEM finally has its breakthrough, that also marks China's capital market has entered a new era. The introduction of GEM will help improve the level and structure of asset markets, expanding the depth and breadth of capital markets, thus a large number of innovation and growth-oriented enterprises will be serviced in the capital markets. Based on this, study on GEM has important significance.The underpricing problems of Initial Public Offerings(IPO) are concerned around theory and practice circles. IPO underpricing means the issue price of a stock lower than its closing price listed on the first day, thus investors to subscribe for IPO shares obtain extraordinary returns. The small and medium enterprises (SMEs) will be conducted the earnings management before IPO to meet the listing requirements and expand the scale of financing. In the secondary market the first day closing price is often high, and there is the phenomenon of excess returns, because of the second stock market weak form efficiency and strong speculative atmosphere. Then is there any relation between the pre-IPO earnings management and the existence of IPO underpricing which against the market effectiveness? Can market earnings management before IPO explain the problem that high underpricing after listing?This paper studies the core issue "the impact of Pre-IPO earnings management on IPO underpricing" through methods of a combination of specification and empirical. This paper reviews the existing literature, analysis theory origin of earnings management and IPO underpricing, uses the extended modified Jones model to measure earnings management, and researches the impact of pre-IPO earnings management on the IPO underpricing of the first listing day about corporate listed on the GEM during October 2009 to April 2011. It finds that there is IPO underpricing problem in the GEM and there is common earnings management behavior during IPO process; There is significantly positive correlation between the change of price on the first listing day and the level of earnings management before IPO.The paper further analyses the impact of pre-IPO earnings management on IPO underpricing from two aspects, upward earnings management and downward earnings management, and finds that the secondary market investors has over-react on the beautification of financial reporting information, so the rate of increase of closing price is greater than the rate of increase of the issue price, which makes IPO underpricing more severe; for downward earnings management, because of the strong speculative atmosphere of secondary market which making the existence of rigid for closing price declined, the reduced rate of the closing price is less than the reduced rate of the issue price, thus finally IPO underpricing increases. IPO underpricing is due to system defects of first market which leading to IPO pricing more dependent on financial reporting data, while the weak form efficiency in the secondary market makes over-reaction on the financial report, also coupled with the existence of speculation, causing the share price is off its true value, thus the formation of high underpricing. Based on the conclusions, this paper suggests a series of policies and systems proposals to improve the present situation of earnings management and IPO underpricing. |
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