An Empirical Analysis Of Earnings Management And Governance In The Process Of Equity Refinancing

In recent years, China’s listed company equity refinancing enthusiasm rising,showing a share “Rights issue’s enthusiasm”,“Issuing new share’s enthusiasm”. In therelative scarcity of resources, the listed company cut-throat competes to raise morecapital. In2008the Lanzhou San mao industrial Limited by share Ltd inflated profits3000000, serious damage to the interests of minority shareholder; at the same year,ZOJE Holding Group Co. Ltd irregular possession of funds, the commission madeadministrative penalties to ZOJE on the compensation the loss of investors. This caseseries suggest that regulate the securities market has become more and more important,how to optimize the allocation of resources, improve efficiency in the use of funds tothe stock market has become the focus of attention of the academic circles and practicalcircles. In order to protect the interests of investors, maintain the market order, optimizethe allocation of resources, the commission strictly limit the listed company refinancingqualification, which to some extent regulate the listed company’s equity refinancingbehavior, but also induced the listed company’s earnings management motivationthrough profit manipulation. In2006, the commission issued “Administrative measuresfor the issuance of securities listed company”, which is more strictly than the originalpolicies and regulations, listed company began a new round of earnings management inorder to cater to the new policy.Based on the literature review of domestic and foreign, this paper recommendsbasic theory includes motivations and ways of earnings management, institutionbackground, theoretical basis and methods of the equity refinancing, and themotivations and consequences of earnings management in the process of equityrefinancing. Then paper put forward the hypothesis according to two motivations ofearnings management and corporate governance’s role in the process of equityrefinancing on the basis of the institution background and theoretical analysis. Previousresearch on the motivation of earnings management are more broad focus on whetheris existence the phenomenon of earnings management seldom on earnings managementmotivation in the process of equity refinancing. This article holds that listed companyhave two major motivations in the process of equity refinancing: achieving refinancinglifeline and increasing the stock issue price. Meeting the equity refinancing policyrequirement is the premise of the listed company refinancing, increasing the stock issueprice is methods of obtaining more controllable resource. In empirical study, we choicelisted company which is successful implemented equity refinancing during2006to2011as research samples. Paper made descriptive statistics and sample T test to ROEthree years ago and equity refinancing year, and design regression model to research relationship of earnings management, the issue price of the stocks and corporategovernance index.The results show that, listed company has upward earnings management in theprocess of equity financing, and with the improvement of maneuvering accrued profitsthe number of the rights issue corporations will increase most issuing new sharescorporations have upward earnings management, which focus on the group that ROE isslightly higher than the6%earnings management has positive effect on relationship ofcorporate earnings and the stock issue price corporate governance is negative related toearnings management in the process of equity refinancing, corporate governance has anegative effect on the relationship of earnings management and the issuing price of theshares. The research result shows that listed companies have a strong earningsmanagement motivation in order to meet the lifeline to equity refinancing and boost theshare price. Perfect internal governance mechanism can effectively inhibit theoccurrence of earnings management, for example, the larger board size, the greater theproportion of independent directors, the board chairman and the general managerseparation the greater the size of the board of supervisors, earnings management ofthe listed company is lower,the impact to stock issue price is less.According to the results of theoretical analysis and research result, this paperreached conclusion that listed company have earnings management phenomenon in theprocess of equity refinancing. In order to regulate the equity refinancing market, paperput forward five policy suggestions includes sounding accounting standards,establishing the index evaluation system, strengthen information disclosure, andestablishing and improve the internal governance mechanisms. It has positivesignificance to standardize financing behavior of listed corporation, protect investors’interests, promoting the healthy development of stock market. Although the theoreticalresearch and empirical analysis of the earnings management has been going on fordecades, and have gained certain achievements, but the discussion for the earningsmanagement will not stop. Due to the limitations of sample selection, sample time spanis shorter and the variable measure choice, this paper has so many defects. With thecontinuous development of market, policies introduced gradually and the constantimprovement of governance structure, the research on earnings management will becontinue.