Control Of Largest Shareholder,Equity Pledge And Earnings Management

Equity pledge is a financing method of shareholders.In 1995,the guarantee law was officially launched,which laid its legal basis.In 2013,the standardized pledge repo business indicated its development direction.Equity pledge can make shareholders solve financing needs without losing control of the listed companies.Due to the advantage of transparency,norm and liquidity,equity pledge is widely accepted by the market.By the end of 2018,the controlling shareholder of 1453 listed companies conducted equity pledge,accounting for 40.5%of the total number of listed companies in A-share Market.The total market value of the pledged stocks of Shanghai and Shenzhen Stock Exchanges reached 201 billion yuan,accounting for 4.6%of total market value.When prices of the pledged stocks fell sharply,financiers might face credit risks,such as additional pledges or even forced liquidation.In 2018,according to funders,the controlling shareholders and their concerted actioners with default on equity pledge account 179,and the default amount reaches 48.2 billion yuan.The credit risk of controlling shareholders can be further transmitted to the listed companies,which will worsen the market panic and increase the downward pressure on the stock price.In order to avoid the transfer of control rights,the largest shareholders of listed companies have strong market value management motives.They tend to convey the signal of well-functioning to the market by manipulating the financial profits of listed companies.At the specific operational level,earnings management includes accrued earnings management and real earnings management.Accrued earnings management means adjusting accounting policies and accounting estimates to affect the financial profits of listed companies,while real earnings management means constructing real economic activities.We use the 2006-2017 A-share listed company as sample for empirical regression.We find that equity pledge behavior of the largest shareholders has a positive effect on both types of earnings management.State-owned enterprises enjoy more convenient financing methods and face stricter internal and external supervision.Therefore,compared with private enterprises,they tend to use real earnings management methods.There is a positive correlation between ownership concentration and real earnings management,and a negative correlation between ownership concentration and accrued earnings management.The increase in the shareholding ratio of major shareholders means that they have more control over the company's operation and management,so they prefer to use real earnings management.