An Empirical Study On Therelationship Between Earnings Management And Post-IPO Performance Of The Initial Public Offerings In The ChiNext

On October,30th,2009，the first28firms went public together on the ChiNext of theShenzhen Stock Exchange. The ChiNext financed small and median-sized enterprises withhigh growth potential, high-tech and involving in innovative economies, service, agricultural,materials, energies or business models. Yet some of the firms which were supposed to growquickly and create remarkable returns, turned out to perform in an opposite way. In April,2012, the delisting policy of the ChiNext was officially approved, revealing the risks of thosefirms that underperformed.Some scholars insisted that the phenomenon of the post-IPO underperformance related tothe earnings management behaviors during the IPO process; however, others believed that nosignificant earnings management behavior was discovered in IPOs. At the very beginning ofthe ChiNext, when relative regulations were not perfect, did IPO firms in the ChiNext managetheir earnings? How were the operating performances of these firms post-IPO? Did thechanges in performances relate to the firms own characters and the macro-economy? Orwere they just the consequences caused by the earnings management behaviors during theIPO process? These were the problems I would look into.By researching literature home and abroad, I compared and sorted out two oppositeopinions. One insisted that IPO firms managed earnings opportunistically and the otherbelieved that there weren’t any significant earnings management behaviors and even if therewas one, it was just a signal of the firm’s prospect. Moreover, the earnings managementdetecting models that these conclusions came from diverged. In order to improve the accuracyand stability of the result of my study, I decided to summarize the diverse earningsmanagement models and innovatively evaluate the effectiveness of their estimation results.With these, I would be able to pick up the best models and estimate the earnings managementextents of sample firms. Then, I would examine various hypotheses, including whether theearnings management behaviors did exist, the changes of performances pre-and post-IPO, therelation between the degree of IPO earnings management and post-IPO performance, andfinally the reasoning of the post-IPO underperformance.The research result of my study indicated that on the whole, the full sample of IPO firms in the ChiNext, exhibited aggressive earnings management behaviors in the IPO process anddid underperform significantly post-IPO. However, the empirial study on specific samplesuncovered the different characteristics of earnings management and their relationships withthe changes in the firms’post-IPO performance of various industries. Asset-in-place andtechnology-based firms displayed aggressive earnings management behaviors and sufferedfrom great depression in their financial performance post-IPO. The aggressive earnigsmanagent behaviours were the exact reasons for the underperformance post-IPO. Otherindustries, such as science-based and service and culture-related firms, choosing aconservative strategy instead and going through a relative milder underperformance, turnedout that the conservative earnings management behaviors were not the cause of the slightunderperformance but the impetus of the post-IPO performance growth. What’s more,discretional accruals in the IPO year of the technology-based firms, could predict theperformance levels in the first three years post-IPO, meaning that the discretional accrualscould be interpreted as signals of the firms’ prospects which the firms intended to deliver totheir investors. Besides, various firm characteristics acted on post-IPO performance in asimilar way for different industries. Firm size and years of establishment affected post-IPOperformance positively, while growth potential and the stock holding ratio of the first largeststockholder worked negatively. In the end, based on the research result, I would conclude andpromote some suggestions on perfecting relative laws and instructions, regulating IPOs in theChiNext and identifying investment risks for investors etc..