Discussion About Earnings Quality Of The Listed Company On GEM

In1990, the Shenzhen Stock Exchange and the Shanghai Stock Exchangeestablished in succession. Since then, the capital market is expanding with the rapiddevelopment of China’s economy, and it has been playing an important role in China’seconomic system. As everyone knows, in the capital market, through which, enterprisesraise money and investors finance enterprises, the accounting earnings information isthe link among parties of the capital market, and it has attracted extensive attention frompeople. Earnings are regarded as basis for decision-making, which includes theinvestment and credit decision made by investors and creditors, qualification decisionon companies’ applications for listing made by government departments. However, thereports that companies announced only reflect the quantitative level of earnings, and onthe other hand, the quality level of earnings is difficult to judge. Therefore, theevaluation for earnings quality has become an inevitable trend. The Growth EnterpriseMarket (GEM) officially opened in October2009, and it provides financing and capitaloperation place for developing innovation companies, especially high-tech companies.Compared with companies listed on the Main Board, the GEM’s listed companies aremostly in the start-up period with small-scale and high risk, and therefore, earningsquality is the guiding light for investors and other accounting information users.Moreover, after the establishment of the GEM, Suzhou Hengjiu patent fraud was underinvestigation, Wangsu Technology was suspected of listing with packaging, Tonghuawas involved in performance fraud, and all these events make the investigation of GEMearnings quality issues particularly important.Based on standard research method, this thesis aims to discuss the earnings qualityissues of the GEM’s listed companies with respect to the characteristics of China’s GEM,seek causes of the low earnings quality of the GEM’s listed companies, and proposemethods to improve the earnings quality of the GEM’s listed companies concentratingon the causes. This thesis mainly covers the following aspects: earnings literaturereview on earnings quality research, theoretical overview of the GEM and earningsquality, earnings quality status of companies listed on China’s GEM, reasons analysisfor the low earnings quality of the GEM’s listed companies, strategies to improve theearnings quality of companies listed on GEM, conclusions and outlook. Specifically, itincludes the following sections:The first Section is literature review on earnings quality research. This sectionsystematically reviews related works on earnings quality, and summarizes the researchresults at home and abroad to raise the problem this thesis focuses on.The first Section is a theoretical overview of the GEM and earnings quality. This section presents concepts and characteristics of the GEM, elaborates on the connotationof earnings quality from different perspectives, and explains the measurement ofearnings quality from the perspectives of the earnings quality characteristics, capitalmarket, and earnings management. Besides, this section discusses the asymmetricinformation theory, commissioned agency theory, comprehensive surplus theory, andother related theories.The third section introduces the earnings quality status of companies listed on GEM.This section describes the earnings quality status of China’s GEM listed companies fromqualitative and quantitative analysis. Firstly, qualitative analysis is based on severalcharacteristics of earnings quality. Secondly, by using the extended Jones modelproposed by Lu Jianqiao in1999and selecting a typical industry, we calculate andanalyze the values that can represent the earnings quality of GEM and the main boardrespectively, coming up with conclusions, which further evidence the qualitative resultson the current situation of China’s GEM earnings quality.The forth section focuses on the analysis of the reasons for low earnings qualitystatus of GEM’s listed companies. Specifically, there are several reasons:1) theintrinsic characteristics of the companies listed on GEM, including the small size of thecapital, the high-growth, and high-risk;2) selectivity and vulnerability of the relevantaccounting standards;3) the vulnerability of the GEM external supervision, which isexplained from the aspects of the GEM supervision mode, the sponsor system, delistingstandards, public supervision, and investment;4) the unreasonableness of the internalgovernance structure, which is illustrated from the aspects of the high concentration ofshareholding, the centrality of management, incomplete functions of the independentdirectors and the board of supervisors;5) defects of the internal control system,including the internal control environment, risk assessment consciousness, and theoperation of internal supervision.The fifth section gives solutions according to the reasons analysis above. Thesolutions include improving the system of accounting standards, improving externalsupervision, optimizing internal governance structure, and strengthening internal controlsystem.The sixth section is conclusions and outlook.