Research On Earnings Management Affected By Stock Rights Pledging

Since 20th century, stock rights pledge has been commonly welcomed by listed companies. Until January 2016,1372 companies have pledged their stocks in different ways. Stock rights pledge played a positive role in financing, but the companies which pledged their stocks might have to bear the risk from falling stock prices. To effectively mitigate the risk, management is likely to enhance these companies'stock price through implementing earnings management. Therefore, the research on the stock rights pledge together with company's earnings management behavior is important in terms of controlling risk and improving the corporate governance.Taking the listed A-share companies which pledged their stocks in China from 2004 to 2014 as the study objects, this paper investigated the influence of external environment on the earnings management behavior of these companies. This paper also discussed the mechanism of the influence and the factors in selecting earnings management modes. It found that the companies commonly implement both accrual earnings management and real earnings management before and after pledging their stock rights. Compared with the period before the stock rights pledge, the companies' accrual earnings management level significantly reduced, while the real earnings management degree increased significantly after stock rights pledge, which suggests that stock rights pledge may induce accrual earnings management in real earnings management. Further study showed that the degree of the effect above for private enterprises was more important than state-owned enterprises.As the stock market is volatile, the possibility of earnings management after stock rights pledge is gradually highlighted. Therefore, in order to supervise and improve the situation, this paper suggested that the policy makers should complete the related polices, deepen the listed company information disclosure system reform, continue to improve the corporate governance mechanism and actively promote external supervision, so as to provide the stock rights pledge with a better formal institution guarantee.