An Empirical Research Of Earnings Management Based On Equity Refinancing Of The Listed Companies

The stock market is a good financing platform in the process of economic development. The total turnover of Shanghai and Shenzhen stock market was only68.1billion yuan by the end of1992. but it reached42.1646trillion yuan by the end of2011.The funds are the blood for a company to maintain its survival and development, in general, companies have two ways of financing the needed money, one is accumulation by its own business operation, the other is by external financing. External financing includes debt financing and equity financing. China’s listed companies extremely prefer the equity financing, so the stock market has become the best financing platform. However, China Securities Regulatory Commission has many policy requirements in terms of equity financing of these listed companies. In order to meet these requirements, lots of public companies take means of earnings management and whitewashing the financial statements to obtain financial support to solve the funding dilemma. All the countries in the world are facing the listed companies’ financial fraud, either it is in developed countries with comprehensive policies and regulations or in developing countries with emerging securities markets such as the Xerox event. Enron event in America and Changhong financial fraud. Kelon Electrical event. Yinguangxia event in China. Financial fraud is so outrageous that it deceives the investors and brings the painful thought for us. The meaning of earnings management is that the management of the company utilizes the method of accounting policies and accounting estimation to control and adjust the earnings information reported to the outside world on the condition of not violating relevant regulations or principles of accounting standards. Its purpose is to make the outside investors and regulatory authorities not clear about the performance of the company to achieve the certain aims such as circumventing the constrains of the debt covenants, obtaining the eligibility of funding, evading taxes to meet private interest and expand the value of the company. Driven by preference of equity refinancing and the purpose of funding the needed money from the capital market. China’s listed companies manipulate the financial data to manage earnings. The listed companies make investment analysis and regulatory analysis of financial information users difficult by packaging the financial statements. It is of an important role to understand the financial performance of one company by identifying earnings management of listed companies.This paper tested whether the listed companies have conducted the earnings management before equity financing and talked about how this behavior affected the companies’operating performance. This perspective enriched the study of earnings management by considering of both angles of the profits and real activity though many scholars have conducted a lot of research and papers. So this paper introduced two models to study it respectively.The empirical results showed that the listed companies used both accrued profits and real activities manipulation of earning management in equity refinancing process. But then, using different earnings management caused different results of company performance. Using the accrued profits caused the short-term decline of company performance while using the real activities manipulation caused the long-term decline of company performance. Therefore the main reason for the decline of company performance is the earnings management of real activities manipulation.Research framework and content of this paper is as follows:Part Ⅰ:Introduction. This paper first introduced the research background and significance and elaborated the research framework and innovation, and listed some existing deficiencies in the study.Part Ⅱ:The research status of earnings management. This part mainly reviewed the foreign and domestic research papers.Part Ⅲ:Theoretical analysis. This section included three major aspects, theoretical analysis of equity refinancing, basic theory related to earnings management analysis and model analysis of earnings management measure.Part Ⅳ:Empirical research design. This part mainly elaborated hypotheses, the choice of variables, data sources, and model design.Part Ⅴ:Empirical research process and results analysis. This part utilized empirical methods of the accrued profit model and real activities manipulation model equity refinancing of the company to conduct a study to analyze whether the extent of earnings management and earnings management, and then used the same empirical methods to study two different means of earnings management on the performance of the company.Part VI:The conclusions and recommendations of this study.