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On the split share structure reform of listed company earnings management

Author: LiYaJun From: www.yourpaper.net Posted: 2009-08-06 23:55:40 Read:
[Paper Keywords] split share structure reform earnings management company governance
[Abstract] This article describes the meaning of the split share split share structure reform will be based on the concept of earnings management that will inhibit a certain degree of earnings management of listed companies, and also raised the issue of corporate governance of listed companies in China will not full circulation of the shares to be completely resolved.

"Split share" refers to the A-share market, shares of listed companies according to whether the stock exchange trading is to distinguish between non-tradable shares and tradable shares, which is a special problem in the process of China's economic transition. On split share to distort capital market pricing mechanism to the constraining resource allocation function effectively; company's share price is difficult to form a market-based incentives and constraints of the major shareholders, management, corporate governance, lack of common interests foundation; capital flows, there are non-tradable shares transfer agreement auction two prices, capital operation and outstanding shares of the lack of market-oriented operation base. Equity sub-set can not meet the requirements of the current capital market reform and opening up and stable development, must split share structure reform, the elimination of non-tradable shares and outstanding shares of the circulation system differences.
"Split share" is the most serious institutional flaws in China's capital market, in many respects the fundamental change of norms restricting China's capital market development and state-owned assets management system, released in April 2005 SFC listed companies tradable share change management approach ", September 4, 2005, the Commission formally announced the shareholding companies listed on the notice of the relevant issues of the Reform of the Split", it's released to improve the procedural norms of the split share structure reform of listed companies in China's capital The history of the development of the market is an important milestone and a turning point.

A split share structure reform
The split share structure reform, the process is non-consultative mechanism of the balance of interests between the shareholders and the holders of tradable shares in circulation, eliminate the transfer of shares of the A-share market institutional differences. From the micro level, the share set solution to the problem will be to improve the corporate governance structure and capital operation mechanism, so as to enhance the overall quality of listed companies, and to enhance the confidence of the public holdings of corporate shareholders. Macro split share problems will eliminate the difference of the circulation system of non-tradable shares tradable shares to strengthen market constraints functional behavior of listed companies; price discovery function of the recovery of the capital market in a certain extent, capital markets function round play to create conditions to promote a thorough reform of the securities market, and fundamentally effective way to boost investor confidence.

Second, earnings management of listed companies
Earnings management company management authorities in accounting means or the actual business activities and transactions within the range allowed by the Accounting Standards and the Companies Act for the purpose of the act in order to achieve the impact of surplus. Earnings management is an important area of ??modern financial theorists, to carry out in-depth research on earnings management not only help promote the development of accounting theory, but also changes in generally accepted accounting principles in the formulation and accounting practices, corporate governance, capital the effective operation of the market, the company's accounting behavior, improve public information disclosure mechanism is a huge impact. All along, the distortion of accounting information of listed companies at home and abroad is a very common phenomenon. The distortion of accounting information, and some are purely accounting fraud, while others are due to earnings management. Accounting fraud is a deliberate fraud company authorities, the accounting distortion thus formed should be stopped and severely punished according to law. Earnings management is the freedom of choice of accounting, choose to maximize their own utility or enterprise market to maximize the value of a compliance lawful act. Some scholars even believe that earnings management demonstrated strong vitality, has become the world's major companies financial managers should master a basic skill. Although earnings management necessity and rationality of its existence, it has always been contrary to the authenticity and reliability of the accounting principles, and contrary to the spirit of high-quality financial and accounting reports. Company management authority disclosure of accounting information only from their own point of view, is very likely to be interested in the construction and function of the majority of investors and the capital market as a whole play to have a tremendous negative impact.
Of corporate earnings management behavior with distinct Chinese characteristics, and epitomized in listed companies, in a sense, leads to earnings management of Chinese enterprises listed companies.
Third, the split share structure reform of earnings management of listed companies impact
The split share structure reform played a role of inhibition of earnings management of listed companies in the following areas:
(A) to improve the governance structure of listed companies
The split share structure reform to make the full circulation of shares of listed companies to be solved due to the dominance and lack of clarity of property rights, the proportion of tradable shares is too small problem. In the split share about 2/3 of the shares in circulation, and the high concentration of shareholding in the non-tradable shares, the state-owned equity stake of about 60%. Many listed companies held by the largest shareholder and some proportion of more than 50% of state-owned shares in a position of absolute control. Such controlling shareholder can easily use its controlling position to manage earnings, manipulation of accounting information and misleading investors. Shares in full circulation, the controlling shareholder difficult to maintain its position of absolute control, thus reducing the possibility of earnings management. Meanwhile, the controlling shareholder in the process of operating companies, if poor management, will lead to a drop in prices of the shares of listed companies, at this time there will be other shareholders through the acquisition of shares of listed companies to obtain control over listed companies, the former controlling shareholder loses Holdings status of listed companies enthusiasm and the possibility of related party transactions is also greatly reduced.
(B) to promote the listing of the company to focus on the value of the company
Solution of the split share the full circulation of the shares will effectively suppress the secondary market speculation remodeling rational investors value investment philosophy. 2/3 of the shares of the listed companies in the case of split share is not in circulation, only 1/3 of the shares in circulation, a smaller proportion of the outstanding shares, under the "one share, one vote" system, tradable shareholders to participate in the company business decision-making ability is very limited, through participation in company decision-making to improve the power of the Secretary value, the few tradable shareholders expect to benefit from the period of development of the company, but rather to realize their own income by getting the bid-ask spread, also known as speculation. This speculative behavior of stock price fluctuations can not correctly reflect the company's operating results, a serious impediment to the play of the resource allocation function of the stock market is not conducive to the formation of the value of the investment philosophy of the majority of investors. After the full circulation of the shares, the shares no longer circulation of the points with the non-tradable, all shareholders have a common goal of interests, the rise in the value of the company, rather than the historical nature of the book surplus. In this way, the enterprise management authorities will be interested in the book surplus gradually lost interest in and focus on improving the operation of the business, to increase the company's cash flow up.
The split share structure reform, however, only the problem of the defects of the system of China's stock market on the one hand, the corporate governance of listed companies in China will not be completely resolved because of the full circulation of the shares. Moreover, the principles and policies of the reform of state-owned assets is clear that, for the consideration of national security and economic strategy, the state-owned capital will have some of the basic industries and strategic sectors Holdings. Secondly, the listed company's internal control problem persists even in the state shares in full circulation. Internal control even in countries with developed Western economies, is also troubled by an issue of corporate governance. Therefore, the phenomenon of earnings management of listed companies in China will not disappear because of the full circulation of shares.

[1] Liu Yueping, background and behavior of Chinese listed company earnings management system, financial and accounting issues in the transition economies, China Financial and Economic Publishing House, 2000
[2] Tang Guliang, Zhu Lei, from corporate governance and business model to see U.S. companies accounting fraud, accounting research .2002.12
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