The Study On Earnings Management In Internal Capital Market

Recent years, a large number of group enterprises emerge at a historic moment, this situation paved the way for the existence of internal capital market(ICM). ICM could exist countless influence on alleviating financing pressure and reducing transaction costs of internal transaction. However, it would also provide "abundant" methods of utilizing these transactions to fulfill earnings management.Regarding internal transaction as penetration point, this thesis deeply excavate earnings management existed in the internal capital market. Firstly, general survey concerned with the basic theory of internal capital market and earnings management was conducted. Then, on the basis of that point, the connotations and characteristics of internal capital market earnings management have been concluded. On the other side, the generation mechanism of this behavior was probed into from two dimensions:internal agent and external conditions. This thesis pointed out that financing constraints, tax avoidance and dominant stockholder private benefits of control are the several internal agents; pyramid holding structure and imperfect accounting system the several external conditions. Hence, this thesis analyzed the specific method of conducting earnings management existed in the internal capital market, and the influence it has been exerted on the group enterprises. It was revealed that internal capital market transaction was an important way of conducting earning management behavior, mainly include:internal products exchange, internal rent, internal lending, internal guarantee, internal assets and equity transfer, internal charges and apportionment. Meantime, in spite of some positive attitudes, this behavior would also reduce the enterprise overall value and decline the efficiency of internal capital market. Based on the above study, this thesis quantized the internal capital market earnings management degree, then empirically test and analyzes the factors which influence internal capital market earnings management behavior. The result shows that internal capital market earnings management was significantly positive correlated with tax avoidance, shareholder control and two right degree of separation; positive correlated but not significant with external financing restraints.Through theoretical research and empirical test, this paper revealed that tax avoidance, shareholder control and two right degree of separation have an great influence on the internal capital market earnings management. It is worth mentioning that, although it has been proved theoretically that dividend payout ratio would also have an influence on it, however, this conclusion hasn’t been empirically tested. The author think that the main reason should be the imperfect dividend payment system. Based on this, in order to eliminate the adverse effect which internal capital market earnings management has exerted on the group enterprises and promote the al-locative efficiency of internal capital marker, this thesis put forward relevant standard countermeasures from the dimensions of improving enterprise financing environment, company’s internal management and information disclosure requirement respectively.