The Empirical Research On The Effect Of Venture Capital On Earnings Management Of GEM IPOs In China

The successful launch of the Growth Enterprise Market (GEM) in October,2009refined the multi-level capital market in China. GEM, on the one hand provides financing service to more small and median enterprises (SMEs), high-tech SMEs in particular; on the other hand, it offers better options for venture capitals to withdraw their investment from SMEs. Therefore, more and more venture capitals choose to assist investees in the participation of GEM, in which way they can achieve considerable yields. However, in order to acquire the rare listing qualification and a higher issue price, manages of SMEs usually sugar up their companies’ financial reports as a way of earnings management, tampering the regularity and devefopment of GEM. According to prior research, venture capitals may work as the certifier or monitor during the Initial Public Offerings (IPOs) in GEM, mitigating the earnings management of SMEs; yet venture capitals may also "grandstand" out of their own interests and thus aggravate the earnings management.In this paper, we sample193SMEs listed on GEM during October2009to February2012, and select the proper measuring model for earnings management. Through descriptive statistics, Pearson correlation test and multivariate stepwise regression analysis, this paper tries to shed light on the effect of venture capital on earnings management of GEM EPOs. Results of empirical analysis indicate that earnings management overspreads in GEM; compared to non-VC backed SMEs, VC backed SMEs show less earnings management; when venture capital syndicate joins an IPO in GEM, the "grandstanding" effect overtakes the certifying or monitoring effect of venture capitals.