The Analysis Of The Earnings Management Within The Equity Incentive Of Huayi Brothers Media Company

Equity incentive can align managers and shareholders' benefits.So equity incentive can ease the principal-agent problem,improve corporate governance and performance.But equity incentive can also lead to earnings management.Managers can be harmful to the company's benefits when they make decisions on behalf of their own interests.Then it's necessary to take a deep look into the company's earnings management when making appraisal of the equity incentive's effect.It's also necessary to analyze why and how the manager do earnings management and the consequence which the earnings management causes.This dissertation mainly use Jones Model and regression analysis to process the data that how the earnings management changes before and after the equity incentive.We analyze the time spot when the earnings management is obviously changed and compare to the time spot that the equity incentive is announced.Then we found that the earnings management is related to the equity incentive.We also use BS Model to estimate the expenses of the ESO and we found differences on the model parameters.The managers hugely underestimated the expenses of the ESO in order to achieve the exercise condition.And the ROE after non-recurring gains or losses just meet that minimum requirement.This dissertation take Huayi Bros as the case.We first analyze the establishment and IPO of Huayi Bros,the granted objects,the exercise conditions and the background of Huayi Bros' ESO.Then the change of Huayi Bros' earnings management shows that Huayi Bros' earnings management is related to its equity incentive.In sum,the managers did negative earnings management before the equity incentive and did positive earnings management after the equity incentive.Thus helped the managers make a perfect financial statement which just achieved the exercise condition.The ROE after non-recurring gains or losses during the equity incentive is much smoother than before,which also implies that Huayi Bros has earnings management.On the forms of earnings management,we take a deep look into the expense estimation of ESO.Thus we found Huayi Bros have earnings management within the company's ESO,the expense of the ESO was hugely underestimated(nearly 217 million)by applying inappropriate parameters.The managers did negative earnings management to lower the exercise condition and hide profit,then did positive earnings management to achieve the condition and released a more positive signal to the market so as to gain an excess return by exercising ESO.Inadequate supervision also makes it more convenient to do earnings management.Base on the conclusion of this dissertation we suggest that(1)improving corporate governance,(2)improving legal system relate to equity incentive,(3)improving accounting principle,information disclosure system and supervision system.The innovation of this dissertation is that prior researches of equity incentive and earnings management mainly studied cases on the main board market.Studies on GEM are relatively less.This dissertation takes a review of a relatively new case on GEM that applies ESO and earnings management and offers advises to improve supervision.