The Effect Of Large Shareholder's Share Pledge On Earnings Management Of Private Listed Companies

With the development of China's capital market,equity pledge business has become an increasingly important financing method.Although the development of China's equity pledge business has been very rapid in recent years,its safety,rationality,and various risks that may be hidden behind it have also received more and more attention.In order to avoid the risk of value declining after the pledge of equity,the major shareholders have a strong incentive to conspire with management to maintain or increase the stock price by manipulating the surplus of the listed company.At the same time,the introduction of the external governance role of the pledgee will strengthen the external supervision of listed companies,and then affect the company's choice of earnings management.The conspiracy of major shareholders and management to implement real earnings management will damage the company's long-term value and encroach on the interests of small and medium shareholders.In addition,the pledge of equity by major shareholders will increase the leverage effect of control and strengthen the embezzlement effect of major shareholders.A reasonable shareholding structure is conducive to improving the internal governance mechanism of listed companies.The containment of other shareholders against the largest shareholder can to a certain extent inhibit the shareholder's interest encroachment and ensure the authenticity of the financial report.Compared with state-owned enterprises,private listed companies in China face stronger financing constraints,and major shareholders of private listed companies are more motivated to use equity pledges to obtain more financing opportunities.Because the shareholding structure of private listed companies in our country is more concentrated than that of state-owned enterprises,the internal equity checks and balances are also weaker,so the hidden risks of the large shareholders' equity pledge of private listed companies are also greater.This paper selects private listed companies to study the earnings management issues in the context of large shareholders' equity pledge.First,this article reviews the existing literature on the motivation and economic consequences of equity pledges,and the motivation and methods of earnings management.Secondly,based on the theoretical basis of information asymmetry theory,principal-agent theory,etc.,this paper analyzes the mechanism of the influence of equity pledge of large shareholders on earnings management of enterprises.Then,this paper analyzes the earnings management motivations,the selection of earnings management methods,and the governance effects of equity checks and balances in thecontext of major shareholder equity pledges.Finally,the following research hypotheses proposed in this article are tested empirically:(1)Under the same conditions,there is a positive correlation between the largest shareholder's equity pledge of a private listed company and real earnings management,and a negative correlation with accrual earnings management;(2)A higher degree of equity checks and balances can weaken the impact of the equity pledge of large shareholders of private listed companies on earnings management.This article defines the explanatory variable equity pledge as "whether the largest shareholder has pledged equity at the end of the previous period" and is used to study the earnings management behavior of listed companies after the largest shareholder's equity pledge.This article takes2007-2017 non-financial private listed companies as a research sample,adopts the modified Jones model of Dechow(1995)and the method of Roychowdhury(2006)and Li Zengfu(2011)to measure private listed company's accrual and real earnings management levels.In this article,the variable of equity balance degree is measured by the ratio of the company's second largest shareholder's shareholding ratio to the first largest shareholder's shareholding ratio.The sample with the equity balance degree greater than the top 30% of the same industry in the same year is divided into the high equity balance degree group,the sample with the equity balance degree smaller than the last 30% of the same industry in the same year was divided into the low equity balance degree group,and OLS regression was performed in groups.The empirical test results in this paper show that:(1)the pledge of the large shareholder' equity in private listed companies will reduce the company's accrual earnings management level,while the real earnings management level will rise;(2)the higher equity balance degree of private listed companies can inhibit the effect of large shareholders' equity pledge on earnings management.Aiming at the company's earnings management behavior in the context of equity pledge,this article puts forward some policy recommendations from the aspects of improving external governance mechanisms,internal corporate governance mechanisms,and optimizing the information disclosure system of listed companies.First,the external governance mechanism of listed companies should be improved.After the largest shareholder's share pledge of a private listed company,the pledgee's risk management of the company should be more stringent,and its external governance role should be better exerted.Secondly,a reasonable equity structure can play a role in suppressing the earnings management behavior of listed companies after the large shareholders' equitypledge and improve the earnings quality of listed companies.Finally,the listed company should disclose the amount and use of the funds obtained from the equity pledge in detail,which will help stakeholders to judge the value of the company's investment and reinvestment.Further improving the information disclosure system of listed companies in China is conducive to reducing the risks brought by equity pledges.The main contribution of this paper is that most of the existing literatures has carried out research on earnings management behaviors and their economic consequences from the perspective of corporate internal governance,and rarely analyze changes in corporate earnings management behaviors from the perspective of changes in the external governance environment under certain specific backgrounds.This article selects the specific scenario of the equity pledge of the major shareholders of private listed companies,expands the research on listed companies' earnings management and its choice of methods,and enriches the research content on the economic consequences of equity pledge.In addition,this article puts forward suggestions to improve the information disclosure system of listed companies and the internal and external governance mechanisms of listed companies in China.To some extent,this will help to improve the relevant institutional environment in China.The research in this paper also has certain limitations,such as the lack of consideration of financing uses of equity pledges,the length of equity pledge periods,and the discount rate of equity pledges.Ignore the impact of factors such as industry attributes,political connections,and enterprise life cycles on corporate earnings management,these are also the directions for subsequent research.