The Analysis On IPO Effect Of China’s GEM Based On Earnings Management

Performance of listed companies decline evidently after the initial public offering (IPO), which is called IPO effect. This phenomenon exist in China’s GEM since its establishment in 2009. A large number of literatures at home and abroad suggest that companies applying for listing have strong motivation of earnings management in order to obtain the scarce listing qualification and improve the offering price. However, earnings management before listing is likely to have a negative impact on performance after listing, eventually lead to the decline in performance after IPO. Then share price will fall and investors will suffer great losses. Therefore, we inspect the existence of IPO effect in this paper and analysis deeply on the IPO effect of China’s GEM, explore the deep-seated reasons of IPO effect, in order to relieve the IPO effect of China’s GEM, reduce the losses of investors and promote the development of the listed companies.Based on the analysis of related literature at home and abroad, the author combined with the characteristics of China’s GEM market, use the sample of IPO firms listed from 2010 to 2012 to examine their performance from two years before listing to two years after listing, in order to prove the existence of IPO effect in China’s GEM. Then, we use the ratio of discretionary accruals and revenue as a measure to estimate the earnings management of IPO firms in China’s GEM based on the cross-section modified Jones model. Finally, we combine earnings management of IPO firms with its decline in performance to observe the relationship between earnings management and IPO effect and examine whether earnings management is the reason of IPO effect. The empirical results show that IPO effect existed in China’s GEM is serious. IPO firms increase their profit heavily by earnings management before listing. In the first year after listing, companies still increase their profit but at a low level. There is on earnings management in the second year after listing. Earning management before IPO will aggravate the extent of decline in performance after listing, but is not the only reason of IPO effect in China’s GEM.