Research On The Reduction Of Big Shareholders And Real Earnings Management

The successful completion of Share Segregation Reform solves the problem of “the divided state of the stock market in China”. The times of full circulation is coming among the listed companies in China. However, Capital market hasn’t had time to play its role of external governance. That is to say, it did not solve the problem of “the dominant shareholder” fundamentally in the listed companies in China, major stock reduction waves following. Since the successful completion of Share Segregation Reform, the interests of reduction is connected with the market price of the stock, so,the shareholders who intend to reduce the stock may care more about the price of the stock. The price of stock will go up after some “good news” about the company. In order to gain greatest reward from the reduction, the big shareholders may make full use of their superiority of the information and their controlling rights of the company to manipulate the profit of the company before their reduction. Then, they intentionally tell the market a false appearance about the operation inside the company so as to reach the purpose of reduce stocks at a higher price. Obviously, the reduction of big shareholders robs the benefit of small investors in the market and plunders the company’s wealth, contributing to huge damages to small investors. The reduction of the big shareholders have been widely focused on by the academia and practical cycles. So far, the research about the phenomenon of the reduction mainly has been concentrated on the factors which affect the reduction of shareholders and maket response to the reduction. The research about earnings management before the reduction is deficient—the pre-existing researches in this field are mostly about the accrual earnings management before the reduction. But the implementation of the new accounting standards from 2007 cut down the space of accrual earning management. As the result, enterprises have turned to manipulate the high hidden real activity earnings, mainly including manipulating the sales, the costs of production and the expenses. In this paper, we will examine whether the big shareholders manipulate the real activity earnings before the reduction process.First of all, this paper expounds the reduction of big shareholders, real earnings management literature reviews and relative theoretical analysis. Then, this paper selects the listed companies(which is from A Capital Main Market of China from 2007 to2013),where big shareholders’ reduction has occurred. This paper analyzes the real activity earnings management before the reduction process and the factors of thecorporate governance to restrain the real activity earnings management. The research reveals that: ①There exists significant positive real earnings management before the reduction in a company; ②The occurrence of reduction makes the probability of positive real earnings management higher; ③The more the reduction is, the bigger the degree of the real earnings management; ④Equity balance among several big shareholders can inhibit the real earnings management; ⑤The separation of the board chairman and CEO has a positive effect on reducing the real earnings management. The conclusion of this paper may help understand the real earnings management before the deduction, improve the correctness of investor’investing decision and promote the regulation relevantly as well as the Capital market to develop healthily.