The Study On The Relationship Between Pre-IPO Earnings Management And Underpricing In Chinese Companies Listed On GEM

On October30,2009, after ten years preparations, the Growth Enterprise Market inChina was finally launched in Shenzhen Stock Exchange. Launch of the GEM not onlyimproved the structure of China’s capital market, but also solved the long-standingdifficulties in financing problem of small and medium-sized enterprises (SMEs) in China.Since Growth Enterprise Market (GEM) launched, the first listed companies’ stock pricehas been high and "three high" phenomenon is quite serious. Compared with the MainBoard Market, IPO underpricing phenomenon in GEM is more serious. At the same time,since many listed companies are small and medium-sized innovative enterprise with highgrowth, it is urgent to raise a lot of money to support its development, and the GEM hasmade strict rules on earnings index in listed companies, which leads to a part ofcompanies which would like to list but can not meet the listing requirements of theenterprises conducting earnings management before IPO. It is worthy furtherlyinvestigating and verificating that there wether exists a relationship between pre-IPOearnings management and underpricing in GEM Board. On one hand, because thenumber of the study combined with the characteristics of the GEM market on theintrinsic relationship which is between pre-IPO earnings management and IPOunderpricing is less, this article based on the GEM research the correlation between thetwo, which, on some extent, can enrich the research in this area. On the other hand, theresearch which is on the relationship between pre-IPO earnings management and IPOunderpricing can help investors identify the earnings management behaviors of listedcompanies in the IPO process, which can reduce the information asymmetry and otherfactors adversely affected. It can also guide the IPO companies by proper compliance forfinancing in order to improve the transparency of corporate information.At first, this paper adopting the method of combining normative analysis andempirical analysis has carried on the related theoretical analysis, the GEM systembackground analysis and empirical test between pre-IPO earnings management and IPOunderpricing. The first part of this article expounds the background and significance of,this article, literature review, methods, framework innovation point of this article in this paper. The second part analysis the related theories which is between pre-IPO earningsmanagement and IPO underpricing and the relationship of both sides. The third part:Theempirical study design. According to the above theoretical analysis, this paper proposedfive hypotheses, of which the three main assumptions are the H3: Forward earningsmanagement and IPO underpricing are positively correlated; H4: Reverse accrualearnings management and IPO underpricing are negatively correlated; H5: there is apositive relationship between real earnings management and IPO underpricing. Thefourth part adopted the extended Jones model to measure accrual earnings managementand adopted the model of the real earnings management to measure earningsmanagement, to explore the impact of two different earnings management of IPOunderpricing. This paper consisting of336samples conducted descriptive statisticalanalysis,and carried out the involving variables’correlation analysis in the model, and atlast carried on a multiple regression analysis. Through empirical analysis,there are theconclusions as follows.(1)Forward pre-IPO accrual earnings management and IPO underpricing arepositively correlated.(2)Reverse pre-IPO accrual earnings management and IPO underpricing arenegatively correlated.(3) Real earnings management and IPO underpricing are positively correlated.Finally, in the view of the above conclusions, this paper puts forward some policysuggestions as follows. First, reduce the accounting system flexible space to controlaccrual earnings management; Second, raise the transparency of economic activities toreduce real earnings management activities; Third, strengthen penalties for excessiveearnings management; Fourth, improve the Growth Enterprise Market (GEM) issueingpricing system.