| Growth Enterprises Market (GEM) in Shenzhen Stock Exchange was opened in October30th2009. While investors have awaited it for years, the stocks listed in GEM were immaturely speculated. Listed firms in GEM once were featured as high offering price, high PE ratio and highly raised fund, called "three high phenomenon". The operation performance of GEM firms fluctuates frequently, which may result from the manipulation of related firms to improve their financial condition, operation performance and cash flows condition. To be listed in GEM successfully, these firms have to meet some requirements.If managers engaged in earnings management, both the value of listed firms themselves and interest of investors are probably damaged. In the process of initial public offering (IPO), interests of investors would be damaged if offering firms boost their earnings which may be rewound after they issued successfully, while in fact these firms did not have such a promising future development as investors convinced. Real activities manipulation would change the operating activities and cash flow which may harm the value of firms more seriously.In the market, some regulation forces are needed to supervise the earnings management activities of IPO firms. In fact, mainly three forces are existed nowadays-China Securities Regulatory Commission (CSRC), underwriters and auditors. While CSRC would scrutiny all offering firms in similar ways, different underwriters and auditors may impose different impact on their "clients". Auditors High quality auditing reduces information asymmetries that exist between managers and firm stakeholders by allowing outsiders to verify the validity of financial statements, because these experienced auditors are more likely to invest more resources in auditing and to have more reputation at risk than those in smaller audit firms. In the process of IPO an issuer retains an underwriter or investment bank to act as its agent in pricing and selling shares. Providing that fees are stated as a percentage of offer proceeds, an underwriter probably push for a more aggressive price and get more commission without considering its reputation cost. However, underwriters definitely pursuit greater long-term benefits despite of the costly closer scrutiny of issuing firm and larger amount of commission in the short-run. As the act of underwriting involves repeat business with a limited number of underwriters, investors can readily engage in the ex-post evaluation of the quality of the underwriters’ services. It would be very costly and difficult for underwriters to market future issues if the investors involved had already been misled by the same underwriters in their prior IPO investment.In this study, I check whether more prestigious underwriters and auditors have significant impacts on earnings management, accruals and real earnings management activities, in the process of IPO. My study is organized as follows.In chapter one, introduction section will introduce the research background, the significance, related existing research works, and innovation and deficiency.In chapter two, research assumptions are discussed based on relevant economics theory.In chapter three, this section presents variable definition, the data and sample selection. The modals used to measure the level of both accruals and real earnings management is essential so that they are described in details in the section.In chapter four, this section4presents the existing of both accruals and real earnings management in Chinese GEM IPO firms, with investigating the relationship of these two kinds of earnings management. Usually, two different earnings management methods are used to inflate firms’earnings:real activities manipulation and accrual-based earnings management. While accruals management involves in the choices of accounting principles and changes of accounting estimations to change reported earnings without changing the underlying cash flows, real earnings management activities occurs when managers undertake actions that change the timing or structuring of an operation, investment, and financing activities in an effort to influence output of the accounting system. This section just provides evidence on the existence of accrual-based and real earnings management. Rather than mere accruals manipulation, managers seem to engage in two kind of earning management activities at the same time because of close scrutiny of supervisors, limited flexibility of accrual management and so on. While previous studies argue that real earnings management is negative to accrual-based earnings management, this paper has examined that they are positive related in Chinese GEM.In chapter five, I investigate whether more prestigious auditors can regulate the earnings management activities of offering firms and whether they can influence the relationship of two earnings management methods. It has been proved that more prestigious auditors can have a significant impact on accrual-based management but not real activities earnings management, which is different from previous studies. Moreover, more prestigious auditors can compel offering firms to decline two kinds of earnings management activities at the same time.In chapter six, I investigate whether more prestigious underwriters can regulate the earnings management activities of offering firms and whether they can influence the relationship of two earnings management methods. In the process of IPO an issuer retains an underwriter or investment bank to act as its agent in pricing and selling shares. Providing that fees are stated as a percentage of offer proceeds, an underwriter probably push for a more aggressive price and get more commission without considering its reputation cost. However, underwriters definitely pursuit greater long-term benefits despite of the costly closer scrutiny of issuing firm and larger amount of commission in the short-run. As the act of underwriting involves repeat business with a limited number of underwriters, investors can readily engage in the ex-post evaluation of the quality of the underwriters’services. It would be very costly and difficult for underwriters to market future issues if the investors involved had already been misled by the same underwriters in their prior IPO investment. However, while the impact of underwriter reputation on accrual earnings management has been studied extensively, the linkage between underwriter reputation and real earnings manipulation activities remains unexplored. The result of this paper shows that more prestigious underwriters have a significant influence on real earnings management but not accrual-based earnings management. Moreover, more prestigious underwriters can compel offering firms to decline two kinds of earnings management activities at the same time.In chapter seven, I make conclusions and some policy suggestions. |
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