Research On The Relation Of Underwriter Reputation And The Extent Of Earnings Management By Listed Companies In The IPO Process

Underwriter Reputation and IPO earnings management are respectively hot research fields of finance and accounting and there is some connection between them. However, domestic scholars have long been distinguishing them in two separate areas. With rapid economic growth and constant development of the capital market, securities issuing system has undergone4stages which evolved from administrative examination system to sponsor system and marketization of issuing system gradually improved. In the process of reforms of capital market, underwriters and other financial intermediaries have played a more important role. Now, an increasing number of people begin to be interested in how underwriters act and whether function of underwriter reputation mechanism is effective. From the perspective of underwriter reputation, this paper combines underwriter reputation and IPO earnings management and studies the impact of underwriter on the degree of IPO earnings management.Firstly the paper systematically reviews typical domestic and foreign literature on underwriter reputation, IPO earnings management and their correlation in sequence. On the basis of the review, the paper further analyzes the function of underwriter reputation, explains formulation of underwriter reputation mechanism through game theory model, introduces the definition of earnings management, elaborate theoretical basis of earnings management and summarizes its motives. Secondly the paper explores the impact of underwriter reputation on the degree of IPO earnings management and builds hypothesis. Lastly the paper defines variables used in the equation especially measurement of underwriter reputation and earnings management, conducts descriptive statistics, correlative analysis and multi-regression test based on283shares listed on the China GEM market from September30,2009to December31,2011.The results show that underwriter reputation is negatively related with IPO earnings management, but not statistically significant. This indicates that the function of underwriter reputation mechanism is not effective in China. On one hand, underwriters only have limited inhibiting effect on management’s earnings management behavior and don’t fully mitigate earnings management after engagement. On the other hand, underwriter reputation fails to be the carrier of issuer signaling.