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Actual Controllers,Institutional Investors and Earnings Management before Listed Companies’ Private Placement

Author: XieZuoYao
Tutor: FuDaiGuo
School: Southwestern University of Finance and Economics
Course: Accounting
Keywords: Targeted Investors of Placement Actual Controllers Intuitional Investors Earnings Management Corporate Governance
CLC: F275
Type: Master's thesis
Year: 2013
Downloads: 123
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The differences in corporate governance between state-owned and private companies have drawn many researchers’ attention. Knowing the differences can help provide relative suggestions to companies’ corporate governance perfection and supervisors for revolution and development. On May6th, the country published Regulations on List Companies’ Securities Placement, which specifically announced that list companies can issue securities to non-specific objectives and specific objectives. Recently companies implementing private placements become more and more and this attracts researchers’ interest. They found earnings management were regular in private placements, and pointed large shareholders harm small and medium shareholders’ interests in many ways including earnings management. This phenomenon will affect the sustainable development of capital market. Bo and Wu mentioned the important meanings for corporate governance in the difference between state-owned and private companies in the angle of earnings management.In February,2004, government published The Suggestions about Revolution and Opening and Stable Development of Capital Market, encouraged securities funds development and venture capital investment, and pointed institutional investors should become the major force in capital market. As investors related in list companies value, carried the responsibility of protecting small and medium shareholders’ interests, played an important role in capital market, institutional investors should have good effect on corporate governance. In the fast pace of development of private placements, doing research on whether institutional investors have goog effect on corporate governance in lowering the level of earnings management has its actual meanings.The main objectives in this paper are finding out the difference in the earnings management level between state-owned and private companies in private placements, and whether institutional investors lower the level. Noticeably, an important characteristic of private placements is that the target investors are no more than ten, and researchers proved the connections between the target investors and tunneling by large shareholders (Beak et al,2006; Wu et al,2010). Therefore, in this study the target investors will be accounted on.Firstly this study will be the research in the earnings management level difference which can provide suggestions for supervisors, secondly the study will be the governance effectiveness of institutional investors. Thirdly, this paper will consider the target investors’effect on earnings management. The outline of this paper is below.The first chapter will present the significance, outlines, main subjects and the short points of this paper.The second chapter will present the history and current situation of private placements, in the mean time conclude the ways of target investors classification.The third chapter will recall the related researches. Firstly be the difference in the state-owned and private companies, follows by the motives of earnings management, at last comes the corporate governance of institutional investors.The forth chapter is to build hypotheses. Start from principal-agent theory, follow by the three hypotheses of institutional investors-effective supervision, strategy allies, profits conflicts, and then build the hypotheses. The hypotheses include three parts, the preference in choosing the target investors, the difference in earnings management level between state-owned and private companies, the relation between the earnings management and the institutional investors.The fifth chapter is the empirical part. This part will include model design, empirical study, and robust test. The paper will choose the sample companies issuing private placements in the period from year2007to year2012. Jones model will be the one to measure the earnings management.The Sixth chapter will be the conclusion part, and suggestions providing.In conclusion, this study find out:①state-owned and private companies show obvious preference in choosing targeted investors chiefly on state-owned companies tend to targeted investors involved in controlling shareholders and private companies prefer only to issue shares to institutional investors. ②this paper studies the decision on earnings management by managers one year before the targeted placement. The results are different:when the targeted investors are controlling shareholders only, private companies will add the earnings management level.③when the targeted investors are institutional investors only, state-owned companies will add the earnings management level.④when the targeted investors are both controlling shareholders and institutional investors, state-owned companies will lower the earnings management level.⑤As for the institutional investors, this paper finds little evidence showing that they play positive part in corporate governance. They even have negative effects by becoming allies with the managers of the companies in some specific time.This paper has three possible innovations, one is the angle. As private placements being the background, classified by target investors, this paper studies the difference in earnings management in state-owned and private companies. Then it studies the institutional investors influence in lowering the earnings management. In the angle of different target investors, there are no relevant studies in this subject.The second one is the content. After many studies in the motive of earnings management before private placement, there are two researchers studied the subject. This paper adds the influence by state-owned and private companies and target investors, which may fulfill relevant researches.The third one is the thought. Pound (1988) build three hypotheses about institutional investors. Take earnings management as an example, in the past researchers directly found the relation between the earnings management and institutional investors’share. In this paper, before finding out the relation, it firstly discover the difference between state-owned and private companies’motives of earnings management. This thought can find out the kind of principal-agent problem between institutional investors and managers. This may provide a new way to find out the relationship between institutional investors and managers,In the practical way, this study can direct the practice of institutional investors. In the first place, institutional investors should take advantage of their merits to lower the earnings management to protect their own profits; in the second place, institutional investors should protect the interests of middle and small shareholders, judge the earnings information in justice; in the third place, this study can provide some information for investors.This paper has some shortages. Firstly the private placements happen in365days12months in a year, in this period this fluctuation may cause the unstable results using the data one year before private placements. This may advance by using half-yearly even quarterly data. Secondly, measuring the level of earnings management by Jones model, this neglects the true earnings managements, which are the methods as well. Thirdly, the time zone is one year before private placements; however, private placements are strategic decisions which may affluence the companies for many years.Perfecting the corporate governance, establishment and improvement of an incentive and constraint inner environment, ownership structures perfection, lower level of asset-liability ratio, higher degree of participation intuitional investors and stronger supervision and controlling by regulators are essential.

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