TY - JOUR
T1 - Tunneling as an incentive for earnings management during the IPO process in China
AU - Aharony, Joseph
AU - Wang, Jiwei
AU - Yuan, Hongqi
N1 - Funding Information:
An early version, titled “Related-Party Transactions: A ‘Real’ Means of Earnings Management and Tunneling during the IPO Process in China”, was written when Aharony was a visiting professor at Singapore Management University. We very much appreciate the insightful comments and suggestions of Eli Amir, Kevin Chen, Steven Orpurt, and seminar participants at AAA 2006 Washington DC Annual Meeting, Beijing University, The HKUST-SMU 2005 Research Camp, Hong Kong Polytechnic University, The 4th International Symposium on Accounting Research at Shanghai, Nanyang Technological University, National University of Singapore, Shanghai University of Finance and Economics, Singapore Management University, and Tel Aviv University. Aharony and Wang acknowledge the financial support of the Wharton-SMU Research Center at Singapore Management University. Yuan acknowledges the support of the National Natural Science Foundation of China and Program for New Century Excellent Talents in Universities of China. All remaining errors and omissions are our own.
PY - 2010/1
Y1 - 2010/1
N2 - Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999-2001, 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.
AB - Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999-2001, 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.
KW - Earnings management
KW - Initial public offering
KW - Related-party transactions
KW - Tunneling
UR - http://www.scopus.com/inward/record.url?scp=73649104378&partnerID=8YFLogxK
U2 - 10.1016/j.jaccpubpol.2009.10.003
DO - 10.1016/j.jaccpubpol.2009.10.003
M3 - מאמר
AN - SCOPUS:73649104378
VL - 29
SP - 1
EP - 26
JO - Journal of Accounting and Public Policy
JF - Journal of Accounting and Public Policy
SN - 0278-4254
IS - 1
ER -