| Author: | Ng, Lai-man Carmen |
| Title: | IPOS in China : an empirical study of performance, returns, and earnings manipulation |
| Degree: | D.B.A. |
| Year: | 2003 |
| Subject: | Hong Kong Polytechnic University -- Dissertations Going public (Securities) -- China Corporate profits -- China |
| Department: | Graduate School of Business |
| Pages: | viii, 83 leaves ; 30 cm |
| Language: | English |
| Abstract: | Recent financial scandals have raised important questions regarding the integrity of accounting and financial statements. Stakeholders are increasingly concerned about the problems of earnings management and income manipulation. Earnings management is the process by which management borrows (overstates income), and banks (understates income) to reflect strategically convenient earnings. Management exercises its discretionary power to make use of the flexibility available to it, by choosing accounting policies - under generally accepted accounting principles - to achieve particular financial targets. Income is thus a measure that can be affected by the discretionary decisions of management. However, despite the subjective nature of earnings, there is ample evidence to suggest that capital markets are sensitive to both earnings and cash flow, and that investors tend to find incremental information in accruals (Dechow (94), Dechow, Sloan, & Sweeney (1995)). Haw, Qi & Wu (2001) also find that in the Chinese markets, earnings and accruals provide incremental information that is captured in returns. Aharony et al. (1993) found some evidence of the occurrence of earnings management for the period prior to Initial Public Offerings (IPOs) in the US, through the use of positive discretionary accruals in order to opportunistically inflate earnings. However, there is no study that has investigated the use of earnings management through discretionary accruals prior to IPOs in China, and its relationship to initial day returns. The requirement that listed companies maintain profitable operations in China further creates pressure on Chinese listed companies to manage earnings through discretionary accruals. However, China's accounting rules allow less room for managerial discretion, and thus less opportunity for earnings management. This study employs the Jones model and Dechow's modified Jones model to investigate the information content of accruals (discretionary and non-discretionary) as reflected in returns in the Chinese market. We find that in China, even though there is less opportunity for earnings management, pre-IPO accruals have significant informative value in explaining first day and first year adjusted returns. Non-discretionary accruals and discretionary accruals are both found to have significant information content in the initial day IPO returns. This study does not find any significant incremental information regarding discretionary versus non-discretionary accruals pre-IPO, consistent with the findings of Haw et al. (2001) in post-IPO firms in China. Interestingly, however, this study finds that on average, discretionary accruals in prospectus information pre-IPO are negative. This downward manipulation or income "understatement" creates initial under-pricing and abnormally high initial IPO returns for A shares. This significant finding explains Chan, Wang & Wei's (2003) conclusion that the "phenomenal" initial returns of A share IPOs, are subsequently followed by long-term under-performance. The results of this study confirm the use of opportunistic earnings management through discretionary accruals to understate earnings in the pre-IPO prospectuses of A shares in China, creating abnormally high returns on the first day of trading. |
| Rights: | All rights reserved |
| Access: | restricted access |
Files in This Item:
| File | Description | Size | Format | |
|---|---|---|---|---|
| b17376944.pdf | For All Users (off-campus access for PolyU Staff & Students only) | 2.91 MB | Adobe PDF | View/Open |
Copyright Undertaking
As a bona fide Library user, I declare that:
- I will abide by the rules and legal ordinances governing copyright regarding the use of the Database.
- I will use the Database for the purpose of my research or private study only and not for circulation or further reproduction or any other purpose.
- I agree to indemnify and hold the University harmless from and against any loss, damage, cost, liability or expenses arising from copyright infringement or unauthorized usage.
By downloading any item(s) listed above, you acknowledge that you have read and understood the copyright undertaking as stated above, and agree to be bound by all of its terms.
Please use this identifier to cite or link to this item:
https://theses.lib.polyu.edu.hk/handle/200/350