Empirical Study On Venture Investment And Earnings Management Of SMEs In Initial Public Offerings

As China’s capital market and venture investment continue to develop, venture investment’s business objectives and behavior will greatly impact the economics behavior and decision-making of our IPO listed companies.IPO as the first choice of exit mechanism, venture capital is bound to make a great impact on its IPO process. Earnings management, as one of the most important issues, will cause for venture capital’s concern. On the one hand, in order to maintain its high reputation, venture capital would supervise the companies’earnings management; On the other hand, in order to obtain high return on investment, making no restriction on the listed companies’ behavior is possible. Therefore, studying the relationship between venture capital and listed companies’earnings management in the IPO process, will provide a reference not only for investors’ investment decisions making but also for improving the corporate governance structure, regulating the capital markets and formulating the accounting standards.This paper focus on the relationship between earnings management of the listed companies and venture capital in the IPO process. Firstly, it defines the meaning of the venture capital and earnings management, and reviews the theories of them, like certification/supervision theory and by-name/adverse selection theory. Then it introduces the three methods to confirm earnings management-fractional step frequency, aggregate accruals models and specific accruals models, and focuses on six forms of aggregate accruals models. Secondly, using199companies of the manufacturing class listed on SME between2004-2008as the sample. According to the VC shareholding, the sample is divided into two groups, as following, the paper inspect that whether the behavior of earnings management is existing or not, and how the VC shareholdings make impact on it, with the analysis of frequency distribution, the earnings trend and accruals respectively. On this basis, with accruals profits as the dependent vaiiable, VC shareholdings as independent variable, company size, growth, rate of assets and liabilities, results of operations and the reputation of external audit institutions and the lead underwriter as control variables, this paper establishes multiple linear regression equation to further examine the VC shareholding’s influence on earnings management. We find that listed companies on SME have earnings management behavior and VC shareholdings can effectively reduce the level of earnings management in the IPO and the prior years. Finally, combining the characteristics of China’s capital market and listed companies, we put forward appropriate policy recommendations:the government should strengthen the support and guide on venture capital investment, focusing on those companies with a large scale and a fast speed of growth, attaching importance to the supervisory of the external intermediaries, and improving the level of practice, improving accounting standards aims to reduce the space of earnings management.