Influence On Companies In GEM Board After The Introduction Of Delisting Rules

A company chooses earnings management method depending on the policy environment, the competition pressure, external audit quality, financial conditions and other factors. The cost of accrual-based and real earnings management in different policy environment are different, and that's the reason why companies have different choices. When external policy is stricter, although real earnings management costs more, companies still tend to use more real earnings management, which is harder to observe, to avoid the external regulation and analysts' recognition."Plan to improve GEM delisting system(draft)" was issued by Shenzhen stock exchange on November 28, 2011. On February 24, 2012, Shenzhen stock exchange published “the GEM stock listing rules(revised in 2012)” after revising. The rules included the delisting system issued 3 months ago. It added new delisting conditions to the listing rules, renovated the restoring application requirements, added companies who had obvious violation of accounting standards and refused to correct to rapid delisting category, increased the information disclosure frequency for the companies who might be delisted, determined the delisting finishing period for the delisted companies as well as set the delisted companies to the share transfer system.The auditor uses difference-in-differences model to investigate the change of earnings management behavior of companies in GEM board when the GEM delisting system was issued. The empirical results show that the introduction of the delisting system influences companies' earnings management behavior significantly. As expected, after the introduction of the delisting system, the GEM companies reduce the accrual-based earnings management and use more real earnings management to avoid external supervision. Meanwhile, because sales manipulation needs the cooperation with purchasers, it is hard and takes more time, sales manipulation doesn't increases a lot. Due to the characteristics of the GEM board, companies in GEM board are more likely to use expense manipulation and production manipulation because of their convenience and operability. At last, some advice to perfect the GEM system is offered.