Research On Underlying Sides Earnings Management In M&A Of Chinese Listed Companies

With the maturity of China’s capital market and capital allocation functions, mergers and acquisitions (M&A) has become an important way for listed companies to be larger and stronger, the improvement of trading instruments and regulatory policy have provide an important impetus for M&A of listed companies of China.However, the M&A is a complex game process between th acquirors, the underlying companies and the regulators, combined with that the majority of underlying companies are unlisted, which the secondary market investors are faced with serious information asymmetry, the authorities of underlying companies may take earnings management to enhance company performance, thus achieving a high valuation of the underlying assets, which will maximizing their own interests, and damage the interests of shareholders of listed companies, especially small and medium shareholders, at the same time. Therefore, to carry out research on earnings management behavior will help investors determine the value of successful M&A, and will provide help regulators important reference to strengthen supervision of M&A, which will safeguard market order.After the review of M&A and earnings management literature, this paper first study on the existence of earnings management behavior of the subject of M&A, which is never studied by others. The research could be divided into two parts:in the theoretical part, the paper constructed a model to analyze the acquirers and the the underlying companies in M&A events, based the model, this article proved that, upon most occasions, the authorities of underlying companies are motivated to use positive earnings management to improve the valuation of the underlying assets; in the empirical part, this article applied the cross-section modified Jones model to analyze the data of underlying companies in the material assets reorganization events between 2009 and the first half of 2015, the rselut confirmed tha the underlying companies had process a siginificant positive accrual earnings management behavior in the previous year of the material assets reorganization. After verifying the existence of the earnings management behavior in the authorities of underlying companies before the material assets reorganization, this paper explores the main reason affecting the earnings management. The results showed that, the higher proportion of the cash payment, the higher underlying asset leverage, and the relaxtion of supervision, will lead to a higher degree of positive earnings management. However, this paper also explorers that, the outstanding intermediaries, the higher shareholding proportion of acquirors before the M&A, and the both side of M&A in the same industry will suppress the earnings management behaviors of underlying companies.