Tunneling as an Incentive for Earnings Management During the Ipo Process in China

Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999 to 2001, we show that related party (RP) sales of goods and services could be used opportunistically to manage earnings upwards in the pre-IPO period. We also provide evidence that such behavior may...

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Main Authors: Aharony, Joseph, Yuan, Hongqi, WANG, Jiwei
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Language:English
Published: Institutional Knowledge at Singapore Management University 2006
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Online Access:https://ink.library.smu.edu.sg/soa_research/219
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spelling sg-smu-ink.soa_research-12182010-09-22T09:12:05Z Tunneling as an Incentive for Earnings Management During the Ipo Process in China Aharony, Joseph Yuan, Hongqi WANG, Jiwei Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999 to 2001, we show that related party (RP) sales of goods and services could be used opportunistically to manage earnings upwards in the pre-IPO period. We also provide evidence that such behavior may be motivated by the prospect of tunneling opportunities in the post-IPO period, i.e., exploiting economic resources from minority shareholders for the benefit of the parent company. We provide evidence of one such opportunistic tunneling tool: non-repayment by Chinese parent companies of net outstanding corporate loans made to them by their newly listed subsidiaries. Furthermore, we provide evidence in support of our assertion of an association between such tunneling behavior in the post-IPO period and earnings management via abnormal RP sales in the pre-IPO period. Finally, we demonstrate the apparent failure of investors in Chinese IPOs to perceive the link between the two phenomena. The results enhance understanding of the motives for and consequences of earnings manipulation during the IPO process. They highlight a potential additional investment risk facing foreign investors in China's capital markets as well as in Chinese firms cross-listed in non-Chinese stock exchanges, and have policy implications for China and other emerging markets which need to improve the protection of minority shareholders' rights. 2006-12-01T08:00:00Z text https://ink.library.smu.edu.sg/soa_research/219 Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University Related party transactions Earnings management Tunneling Initial public offering Finance and Financial Management International Business Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Related party transactions
Earnings management
Tunneling
Initial public offering
Finance and Financial Management
International Business
Portfolio and Security Analysis
spellingShingle Related party transactions
Earnings management
Tunneling
Initial public offering
Finance and Financial Management
International Business
Portfolio and Security Analysis
Aharony, Joseph
Yuan, Hongqi
WANG, Jiwei
Tunneling as an Incentive for Earnings Management During the Ipo Process in China
description Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999 to 2001, we show that related party (RP) sales of goods and services could be used opportunistically to manage earnings upwards in the pre-IPO period. We also provide evidence that such behavior may be motivated by the prospect of tunneling opportunities in the post-IPO period, i.e., exploiting economic resources from minority shareholders for the benefit of the parent company. We provide evidence of one such opportunistic tunneling tool: non-repayment by Chinese parent companies of net outstanding corporate loans made to them by their newly listed subsidiaries. Furthermore, we provide evidence in support of our assertion of an association between such tunneling behavior in the post-IPO period and earnings management via abnormal RP sales in the pre-IPO period. Finally, we demonstrate the apparent failure of investors in Chinese IPOs to perceive the link between the two phenomena. The results enhance understanding of the motives for and consequences of earnings manipulation during the IPO process. They highlight a potential additional investment risk facing foreign investors in China's capital markets as well as in Chinese firms cross-listed in non-Chinese stock exchanges, and have policy implications for China and other emerging markets which need to improve the protection of minority shareholders' rights.
format text
author Aharony, Joseph
Yuan, Hongqi
WANG, Jiwei
author_facet Aharony, Joseph
Yuan, Hongqi
WANG, Jiwei
author_sort Aharony, Joseph
title Tunneling as an Incentive for Earnings Management During the Ipo Process in China
title_short Tunneling as an Incentive for Earnings Management During the Ipo Process in China
title_full Tunneling as an Incentive for Earnings Management During the Ipo Process in China
title_fullStr Tunneling as an Incentive for Earnings Management During the Ipo Process in China
title_full_unstemmed Tunneling as an Incentive for Earnings Management During the Ipo Process in China
title_sort tunneling as an incentive for earnings management during the ipo process in china
publisher Institutional Knowledge at Singapore Management University
publishDate 2006
url https://ink.library.smu.edu.sg/soa_research/219
_version_ 1770568701178806272