The Stratification System Of The New OTC Market?Venture Capital And Earnings Management

The New OTC Market is an over-the-counter trading system in China's securities market.It's also an important part of China's multi-level capital market and an expansion channel for solving the financing problems of small and medium-size enterprise.Since its expansion to the whole country in 2014,the number of New OTC Market companies has increased rapidly.By the end of 2017,there have been 11,630 listed companies.And the market financing amount was 133.6 billion yuan in the 2017.However,the New OTC Market,China's "NASDAQ",did not live up to expectations.Due to some incentives such as local government subsidies,companies incline to list on the market as soon as possible.As a result,the quality of the companies listed on the New OTC Market vary widely.In addition,the liquidity of the New OTC Market is seriously inadequate.Only half of the companies have had transactions,and the trading volume of the New OTC Market in one year is less than one-tenth of the Growth Enterprise Market in one day.In order to solve the quality and liquidity problems of the New OTC Market,a stratification system was launched in 2016.The system was expected to classify the companies listed on the New OTC Market by specific standards,such as the average net profit for two consecutive years has reached 10 million yuan(official measures),so as to facilitate the information searching of the investors and the financing of the high-quality companies.Since 2016,three batches of companies have entered the innovation layer.At present,the number of innovative companies is 928 announced on May 25,2018.A lot of research at home and abroad indicate that companies tend to manipulate earnings in order to meet regulatory requirements and obtain financing.Under the pressure of financing demand,the company may also have earnings management in the process of entering the innovation layer.Earnings management may violate the original intention of the innovation layer,since it weaken the effect of the tiered system.Therefore,this paper examines that after the promulgation of the stratification system,whether the earnings management of the company at the time of listing on the new OTC Market is significantly stronger than before.And whether the companies manipulate earnings in order to list on the New OTC Market or entering the innovation layer,and further researches the impact of venture capital on earnings management in the process of entering the innovation layer.After a comprehensive literature review,this paper conducts empirical study basing on the principal-agent theory,the identification hypothesis of venture capital and the grandstanding hypothesis of venture capital.The empirical study covers all listed companies in the New OTC Market between 2013 and 2017,as well as those entering the innovation layer between 2016 and 2018.The study shows that:First,after the promulgation of the stratification system,the earnings management of the company for listing on the new OTC Market is significantly stronger than before.And it both encouraged more accrual and real earnings management.Second,The New OTC Market companies conducted earnings management for entering the innovation layer.Third,the companies with no venture capital institution have significantly inhibited the accruals and real earnings management in the process of entering the innovation layer than companies with venture capital participation,therefore,venture capital institutions played an obvious supervisory role in this process.According to the research results of this paper and the existing problems of the New OTC Market,this paper puts forward the following suggestions:First,improving the standard of information disclosure of the New OTC Market company,and specifying the content of information disclosure.The information disclosure of the New OTC Market should be consistent with the main board.Second,strengthen the supervision of information disclosure of the New OTC Market company,mainly relying on external audit,brokerage supervision and venture capital institutions.Third,strengthen the improvement of the New OTC Market tiered system,and introduce specific regulatory and preferential measures for the innovation layer as soon as possible,and then to make the New OTC Market active.