State Ownership and Earnings Management around Initial Public Offerings: Evidence from China

• In Event: Accruals and Earnings Management in International Settings

Abstract

This study investigates the earnings management for firms going public in domestic Chinese equity market. Using a sample of 437 firms, we document that Chinese firms on average inflate earnings upward around the time of initial public offering (IPO). By taking the discretionary accruals as a proxy for earnings management, our regression analysis indicates that the state-owned enterprises (SOEs) manage earnings less than non-state-owned enterprises (NSOEs) around IPOs. Furthermore, we identify three factors of incentives – CEO shareholding, accessibility to equity market and accessibility to bank loans – which play a mediation role. Using the path analysis, we show that taking the three factors of incentives together can explain 66.5% of the correlation between the type of ownership and earnings management in the IPO years.

Authors

• Jing Wang, Hong Kong Polytechnic University

• C.S. Agnes Cheng, The Hong Kong Polytechnic University

• Steven X. WEI, The Hong Kong Polytechnic University