| Summary: | 博士 === 國立臺灣大學 === 會計學研究所 === 95 === This study investigates potentials of earnings management among SPOs (secondary public offerings, hereafter SPOs) in China. Due to regulatory constraints, listed companies in China are practically unable to raise capital through debts financing or bonds issuing. Therefore, equity financing such as SPO is the primary source to raise additional capital after initial public offering. However, the related regulations require a ROE threshold for applying SPO, which may promote incentive to manage earnings. According to the related regulation, this study closely examines earnings management potentials among China SPOs.
A SPO could be regarded as a contract between China security regulator; that is, the CSRC (Chinese Securities Regulatory Commission, hereafter CSRC) and listed firms. Generally, the CSRC sets ROE as a primary measure to justify whether a listed firm is qualified to raise capital through SPO. However, the CSRC has final authority to approve the application of SPO. The CSRC is constantly concerned with potential earnings management because it could contain fraud behavior in the stock market, for example, insider trading. The CSRC found listed companies would like to manage their earnings through non-operating transactions among related-parties; thus, the CSRC ever removed non-operating gains from calculation of ROE in 2001 and set this as regulation. Therefore, to keep transparency of financial information from being misled by earnings management is one of major responsibilities of the CSRC. This study that rigorously examines the potential of earnings management among SPOs in China could provide evidence to the CSRC and assist investors to understand the quality of financial information in the process of SPOs in China.
Based on periods of regulatory change, this study divides samples into two periods, including 1999-2000 and 2001-2004 sample periods. The research findings are as follows:
Ⅰ. For the sample in the 1999-2000 period, firms with ROE slightly exceed minimum regulatory threshold present significantly positive discretionary accruals, and those with ROE slightly exceed required regulatory threshold present both significantly positive discretionary accruals and non-operating income. For the samples in the 2001-2004 periods, firms with average weighted ROE slightly exceed required regulatory threshold only present significantly positive discretionary accruals. These empirical results suggest that the revised SPOs related regulations really weakened the incentives of earnings management by use of non-operating income.
Ⅱ. Moreover, the empirical evidence of this study shows that firms tend to manage their earnings numbers a year before they file for application, when their average past two-year ROEs or operating ROEs are below the required regulatory threshold. In addition, management prefers to applying discretionary accruals for the designated testing periods. Only the sample selected from the 1999-2000 periods evidenced a significantly increasing non-operating income. Therefore, the regulatory requirements lead the incentive and approaches of earnings management.
Ⅲ. Generally the CSRC’s approval decisions negatively correlated with the indicators of abnormal non-operating income in samples of the 1999-2000 periods. These empirical results suggested that CSRC may rule out the firms who suspiciously apply non-operating income to boost earnings. Additionally, the evidence of this study shows the CSCR is not really concerned with whether the applicants have significantly changed in discretionary accruals both for the samples in 1999-2000 and 2001-2004 periods.
Ⅳ. Furthermore, the empirical results also evidence the negative correlation between earnings management measure and post-application performance of the firms approved by the CSRC. Thus, the CSRC should educate their staffs to justify earnings quality. Also, the CSRC should establish class act lawsuit mechanism to encourage investors justifying potential criminal resulting from earnings quality and capital applications.
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