Pledge Of Stock Rights,Institutional Investors And Real Earnings Management

The equity pledge is a kind of secured loan,with the listed company’s equity being the pledge.In recent years,with the rapid development of Chinese national economy and the continuous increase in corporate financing needs,the scale of equity pledges of domestic listed companies has continued to expand,and the market value of total pledged stocks is huge.According to relevant statistics,by the end of the third quarter of 2018,the total market value of equity pledge in Chinese capital market reached approximately RMB 494.42 billion,and the total number of shares pledged by equity was more than 600 billion shares,accounting for nearly ten percent of the total share capital of the capital market.The unique advantages of equity pledge make it one of the most common financing methods for listed companies today.Compared with other financing methods,the equity pledge not only allows the major shareholders who pledge their equity to obtain the funds they need,but also ensures that their control over the company is not weakened.This is because after the major shareholder’s equity is pledged,the pledgee can only enjoy the property beneficiary right of the corresponding equity ratio,and the right to participate in the company’s operation and management remains in the hands of the pledgor.At the same time,compared with the real estate mortgage method with too high bank credit threshold and the movable property mortgage method with unique resource-intensive industry restrictions,the equity pledge takes the company’s equity as pledge,which is relatively liquid and very easy to liquidate.The characteristics make the banks’ disposal cost of the equity pledge method lower,and the risk of equity pledge is more convenient to manage and control,so the banks will be more willing to accept the equity pledge.Of course,although the equity pledge is conducive to the financing of major shareholders,there will be certain risks at the same time.For the pledgor,in order to obtain more funds and maintain the stock price to avoid the risk of transfer of control rights,they will have different levels of earnings management motivation before and after the equity pledge.For the pledgee,the change in the value of the equity will affect the degree of protection of its corresponding claims.In order to avoid that the related claims can not be recover at maturity,the pledgee will strengthen the selection and supervision of the pledged shares,which will increase the risk that the company’s nominal(accrual)earnings manipulation being discovered,which may eventually lead to the controlling shareholder who pledged their equity adopts a more subtle real earnings management method to maintain the stock price.In the long run,the real eraning management behavior implemented by major shareholders will have a negative impact on the company and small and medium shareholders,but because of its hidden means of implementation,it is difficult to be perceived by ordinary individual investors.In contrast,institutional investors have large-scale characteristics as important regulatory factors for enterprises,they often have professionals to regularly analyze the production and operation condition of listed companies.Therefore,there is reason to believe that institutional investors are extremely vigilant against the real earnings management activities of enterprises,which can inhibit the real earnings management behavior of the controlling shareholder.Firstly,based on the collation and analysis of relevant literatures,this paper analyzes the respective relationship between equity pledge,institutional investors and real earnings management,and summarizes the research experience of predecessors.Secondly,based on the relevant theoretical basis,this paper analyzes the internal mechanism of equity pledge,institutional investors and enterprise real earnings management.After the research hypothesis is put forward,the research model of this paper is constructed by using previous experience.Thirdly,the data of A-share listed companies from 2005 to 2015 were collected as research samples,and the regression analysis of the research model was carried out to empirically test the hypothesis proposed in this paper.Finally,the conclusions of this paper was summarizws and some policy recommendations were put forward.According to the results of empirical research,this paper finds that the equity pledge of major shareholders is positively related to the real earnings management of enterprises.The higher the pledge ratio,the greater the degree of real earnings management.The institutional investors can effectively intervene in the real earnings management behavior of major shareholders who pledged their equity.The higher the proportion of institutional investors,the more significant the intervention effect.Moreover,in further analysis,this paper finds that the nature of the enterprise will affect the real earnings management behavior of the major shareholders who pledged their equity.The equity pledge of the controlling shareholder of the non-state-controlled listed company is positively related to the real earnings management,while the equity pledge of the controlling shareholder of state-owned listed companies has no significant correlation with real earnings management.In addition,from the perspective of earnings management choice,this paper finds that the lower the equity pledge level,the more listed companies tend to conduct nominal(accrual)earnings management behavior.Combined with the research conclusions,this paper also puts forward some policy recommendations at the end.Firstly,the relevant regulatory authorities must regulate the equity pledge system and related regulatory requirements,such as perfecting the relevant disclosure system for listed companies’ equity pledges and restricting the proportion of equity pledge,the number of pledges as well as the use of pledge funds.Secondly,institutional investors should strengthen the supervision of the real earnings management behavior of the major shareholder,they can focus on the sales revenue,inventory cost and handling cost in the company’s earnings information,and confirm whether the company has real earnings management phenomenon by judging whether there is abnormality in these earnings information.Finally,the company should improve the relevant governance mechanisms to prevent the earnings manipulation activities of the major shareholders.