The Study On The Relationship Between Pre-Ipo Earnings Management And Underpricing In Gem Board

On10/302009, our28stocks first trading on GEM board, after10years, GEM finally will be established. The establishment of GEM board largely has solved problems in financing of SME. Which provide unlimited power for the development of SME. In order to regulate China’s capital market order, to reduce financial risks and to protect the interests of investors, our governments make some requirements for our SME, parts of them are enterprises’earnings index. Only these enterprises which reach the relevant provisions can be traded on the GEM. So some companies wish to be traded but not up to the conditions had a motivation for earnings management. Which means many companies will make earnings management before IPO. At the same time, our underpricing phenomenon always affect the development of GEM board. So dose the pre-IPO earnings management has relationship with the IPO underpricing? And could the pre-IPO earnings management explain the IPO underpriceding phenomenon?The paper uses the method which ties with the empirical analysis and the standard analysis to study the relationship between the pre-IPO earnings management and underpricing. In the paper, we review some existing researches, and analyze the concept, causes and methods of earnings management, we also analyze the theory Of earnings management. In the view of the institution background of our primary market and secondary market characteristics and According to our country’s investment behavior, we analyze the relationship between the pre-IPO earnings management and underpricing. The paper adopts the modified Jones Model to estimate earnings management, and use the formula of underpricing rate to measure the underpricing level. This paper selects230samples that be traded on the GEM which issued fome year2009to2011July. The result shows that many companies made earnings management before IPO, and there is underpricing phenomenon in china. The underpricing rate has not significant positive correlation with pre-IPO earnings management. The relevance of issue and closing price and the pre-IPO report is better than the real report before IPO. So we claim that the reason of underpricing mainly is our market system flaw which causes the issue price mainly depends on the enterprise report earnings, and at the same time the investors in secondary market cannot correctly identify the real earnings, investors over-react to IPOs report earnings. All these make the market price seriously deviate from its intrinsic real value which causes underpricing phenomenon. Based on the analysis of our empirical research result analysis, we put forward a series of suggestions on improving earnings management and underpricin.