An Empirical Study On Listed Companies’ Earnings Management At The Termination Of Lock-up Period Under Private Placement

When studying the problems of private placement, previous scholars usually set the starting point of issuance period as the research point, there is little research on the earnings management and its influences before and after the termination of lock-up period under private placement. During the period, the stock price usually goes down with the increasing stock supply, on the other hand,the company’s management team would be happy to rise the stock price by manipulating the earnings reports, by doing so they can sell the stock at a higher price after the termination of lock-up period. Little research has examined what is happening before and after the termination of the lock-up period under private placement, which is the area the paper is going to explore.The paper has established a research framework to examine the problem mentioned above. We try to discuss the behaviors and motivations of stakeholders and find out whether the legitimate interests of medium and small investors are damaged by the earnings management behaviors through examining the impact of earnings management on the company’s decision making and the capital market. Regarding to the research methods, we’ve established a mathematical model to analyze the motivation of earnings management before the termination of lock-up period. We select 548 listed companies which had private placement in A-Share market and conduct empirical analysis to find out the existence of the earnings management as well as its economic influences using the Modified-Jones Model, multivariate regression models and Event-Study method. The paper has enriches the current researches related to the earnings management under private placement. Moreover, it also makes contributions for the protection of the legitimate rights of medium and small investors.The following findings are observed after the theoretical and empirical analysis:1. The listed companies has conducted positive earnings management behavior before the termination of lock-up period, in which we observe higher level of earnings management for the sample with its unlocked shares owned by controlling shareholders then that owned by institutional investors. And for the first time we confirm that the level of earnings management before the lock-up period is significantly lower than that at the initial point of issuance period due to the difference of the motivations.2. The company’s earnings management is positively related to its investment spending. The higher the earnings management can reach before the termination of lock-up period, the more prone to over-investment the company will be.3. The stock price goes down near the lock-up period, in which the stock price performs better for the sample with unlocked shares owned by controlling shareholders then that owned by institutional investors.We also confirm that the earnings management is positively related to the short-term stock price at the termination of lock-up period, which is not consistent with the current academic research on examining the relations between earnings management and the long-term stock price.We draw the conclusions that the earnings management can lead to the non-effective investment decisions and market volatility from the findings. Moreover, we hold a different view with some other scholars that medium and small investors are not able to accurately identify the company’s earnings management behavior during the termination of the lock-up period. The company managers are the biggest beneficiaries, while institutional investors fail to supervise the company’s misbehaviors. Lastly, the legitimate interests of medium and small investors are damaged by the earnings management behavior.