A Study On The Influence Of Private-Equity To Earnings Management Of SMEs

With the development of the private equity market in China, in order to achieve IPO successfully, more and more small and medium enterprises (SMEs) get the funds through private equity. About one-third of SMEs are supported by private equity before IPO. Studies of the impact factors on earnings management just focus on ownership concentration degree, ownership balance degree, ownership structure and internal audit, external audit, etc. There is little empirical study on the influence of private-equity to earnings management. In a broad sense, the purpose of this study is explore the new impact factors of earnings management. According to the domestic and abroad studies, this paper will begin with the private equity to study the relationship with earnings management. We find a specific sample group through publish information of the Stock Exchange, drawing on previous research and improving it, study the impact factors of earnings management from a new perspective. We hope that we can propose some recommendations on how to promote private equity to invest SMEs, improve corporate governance of SMEs, thus improving earnings quality of SMEs.We pick the listed companies which IPO before December 31,2007 in the SME board of Shenzhen Stock Exchange as the study sample. We determine whether the company is PE-backed or Non- PE-backed before IPO according to private equity's own characteristics. We combine the theory and empirical research methods, firstly theoretical analysis the relationship between PE and earning management, and then test the hypothesis by empirical research.In the theoretical analysis part, we analysis the relationship between PE and earning management. We conclude the following three points:First, PE influence earnings management through participation in SMEs'management to improve its corporate governance. Private equity investors can take advantage the experience of investment on different industries and areas, and its reputation and relationship can attract excellent managers to the target company. Then the company can improve its corporate governance. Second, private equity investors can use its comprehensive reporting system and monitoring system to monitor the target company's operation management, financial reporting procedure in particular. Third, to gain the excess return, they will inhibit the earnings management behavior of the target company. As the company's earnings management levels are usually positively associated to the value of the company, PE investor will inhibit the earnings management behavior of the target company while they know its actual financial position.In the empirical analysis part, as the companies'pre-IPO financial data can not be achieved and most of the enterprises have motivation for earnings management during the IPO, this article only study the situation after the IPO. Since very few listed companies in 2003-2005(only 49 until 2005), and use Jones modified model to calculate Abs(accruals) will use the total assets of the previous year, which make the sample size is only 39. It will influence the accuracy of Abs(accruals), so we pick the date from 2006 to 2009. In this paper, in order to examine whether the PE-backed company has a lower earnings management level, we use the multiple linear regression model to test the hypothesis. We use earnings management level as the dependent variable; use Abs(accruals) (calculated using the modified Jones model) and the offline item as the measure of earnings management level. The corresponding model is also divided into two model: Abs(accruals) model and the Offline Item model. We use whether the SME is PE-backed or not before IPO as explanatory variable, it is a dummy variables, if SME is PE-backed before IPO, the value is 1; otherwise 0. There are eight control variables, divided into four categoriesIn the empirical regression results in chapter5, PE was significant negative with manipulated accruals and offline item, which verify our hypothesis. So we draw the following conclusions:private equity was negative correlation with earnings management, private equity investors involved in the governance of listed companies to some extent. The SMEs witch is PE-backed before IPO has better corporate governance than those Non- PE-backed, and the earnings management level is lower.This article has three parts, six chapters. The first part is theory framework of the private equity and earnings management, including chapter I to chapter IV, discussed the research background, and the theory of private equity and earnings management. The second part is empirical analysis, including chapters IV and V, this part explain the setting of variables, the designing of the regression models. Then return the regression results, and analyze the regression results. The third part is conclusions and recommendations of the article, and directions for further research. The chapter settings are as follows:Chapter I is an introduction; explain the research background and significance of the article.Chapter II reviews the international research literature on earnings management, analyzes and integrates the literature, proposes that this paper will study the constraint factor of earnings management, adding private equity as a new constraint factor base on the previous research.Chapter III is the basic theory of private equity and earnings management. This chapter points out the motives, measures and objectives of earnings management. It introduces the current situation of PE-backed SMEs, explain the relationship between private equity and earnings management, then proposes the hypothesis.Chapter IV mainly introduces empirical research methods. Base on the Theory analysis in Chapter III, detailed the selection of the sample and model of earnings management level, and the setting of variable and regression model. We carry out the statistical analysis of the variable. This paper use manipulated accruals and the offline item to measure earnings management level.Chapter V is the analysis and explanation of empirical results. Using multiple linear regression model to verify the relationship between private equity and earnings management. Then explain the results of regression. This chapter analyzes and explains the empirical results of Abs(accruals) model and the offline Item model separately, and drowns the conclusions of this article.Chapter VI is the conclusions and policy recommendations, discuss whether the results of regression fit to the hypothesis. Combined with the internal and external governance structure of SMEs, proposes some measures of how to promote private equity to investment for SMEs, improve corporate governance of SMEs, thus improving earnings quality of SMEs.There is few scholars introduce Private-Equity in the study of the relationship between corporate governance and earnings management. However, Private-Equity firms usually have better corporate governance. On the one hand they will participate in corporate governance after the investment, on the other hand PE will also supervise the financial reporting process. The theoretical analysis and empirical analysis shows that private equity can really affect earnings management by improving corporate governance. Possible contributions of this article are as follows:1. Put a new explanatory variables that previous researches did not consider in the regression model, and the test results was significantly correlation. enriched the empirical study of earnings management. We consider private equity can influence earnings management behaviors, from the angle of whether the SMEs are PE-backed or not before IPO, deepen the understand of how ownership structure influence earnings management, expanding the scope of research on earnings management.2. This paper also enriches the theory of the impact of private equity to earnings management. It can be seen in the literature review section, a number of scholars have analyzed the theory of how corporate governance affect earnings management, but seldom theoretical research from the angle of private equity. This paper makes a new attempt, combine with the theoretical analysis and empirical analysis to make conclusions more convincing.3. This paper has some practical significance. According to relevant theoretical and empirical analysis, we reach the policy recommendations on how to promote Private-Equity invest the EMs in the last chapter. Private-Equity's investment in SMEs not only can solve the financing problem, but also can improve the corporate governance standards and the efficiency of business operations.