Research On Earnings Management Behavior And Operating Performance During The Privatization Process Of State-Owned Enterprises

During the property right system reform process, privatization of State-OwnedEnterprises (SOEs) is an important measure in China. Whether earningsmanagement exists or operating performance improves during this process is amajor issue. In this paper, we studied the earnings management behavior andoperating performance during the privatization process of SOEs, based on226listed SOEs which were privatized by M&A during1997to2007.We found that earnings management did exist in the process of privatization.Meanwhile, whether privatized as MBO has significantly negative effect on themeasure of earnings management. The results showed that the managers may usesales expense, administrative expense and financial expense as main tools tomanage earnings.We also found that output, profitability, financial leverage and operatingefficiency of SOEs improved significantly after privatization without industryadjustment. After adjusted by industry median, all these proxies remainedsignificantly improved, while the number of employee declined significantly.Therefore, the effects of privatization of SOEs have two sides. On one hand,there is earnings management behavior during the process; while on the other hand,privatization indeed improves SOEs’ efficiency and profitability.