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The Effect of Pre-IPO Earnings Management on the IPO Underphcing of China’s Growth Enterprises Market Listed Companies

Author: ZhouShu
Tutor: MaoZhiHong
School: Jilin University
Course: Accounting
Keywords: IPO Underpricing Accrual Earnings Management Transaction StereotypeEarnings Management
CLC: F275
Type: Master's thesis
Year: 2012
Downloads: 215
Quote: 0
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Abstract


Since March2011,18US-listed Chinese firms have been suspended fromtrading and four are now delisted from NYSE or NASDQ. The scandal involvingChinese companies shocks U.S. markets. Established on October30,2009, China’sGrowth Enterprise Market (GEM) experienced a dramatic increase in stock prices andthe "three high" phenomenon then became a main discussion. However, the coldmarket began and the GEM entered a long period of adjustment, which incurred agreat loss to investors. Since the establishment,306firms have gone public onGEM. However, the IPO pricing mechanism is questioned due to the "three high"phenomenon on GEM.This paper investigates the effects of two different earning managements on IPOpricing. One is modified Jones model and another is transaction stereotype earningsmanagement accrual management model. Based on signaling models, the "winnerscurse", agency theory, the ownership dispersion hypothesis, and investor sentimenttheory, this paper proposes two hypotheses: H1: Accrued Profit EarningsManagement and the IPO underpricing are positively correlated. H2: transactionstereotype earnings management earnings management is positively related to IPOunderpricing. The sample consists of373GEM companies. In the empiricalanalysis, the descriptive statistics comes first, then the test of correlation and finallythe multiple regression analysis.Conclusion:(1) Accrued profit surplus management (DA/A) are positively related to thetransaction stereotype surplus management (Rmproxy) at5%significant level.(2) The successful online Placing rate, offer size, and earnings per share arenegatively related to IPO underpricing, significant at5%level. The first day turnover and the price-earnings ratio are positively related to the IPO underpricing(5%and10%, respectively)(3) Both the profit surplus accrued management and transaction stereotype earningsmanagement earning management are positively related to the IPO underpricing, butthe former is significant while the latter is not.Based on the conclusion, the paper has the following policy recommendations:First, we should improve the rules and regulations for delisting, and establishfinancial early-warning model to detecting the firms in financial difficulty ex ante.Second, we should also improve the IPO Pricing mechanism by involving long-termfunds and individual investors. Third, we should improve the accounting standardsand enhance investor protection.

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CLC: > Economic > Economic planning and management > Enterprise economy > Corporate Financial Management
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