Earnings Management and Ownership Retention for Initial Public Offering Firms in China

This paper implements a comprehensive study on the value of 139 initial public offering (IPO) firms in Shenzhen and Shanghai A-share stock market during January 2006 to December 2008. Empirical results reveal that earnings management and ownership retention jointly affect the equilibrium market valuation of IPO firms in the presence of information asymmetry. Specifically, this study extends the one-signal framework of Leland and Pyle (1977). In other words, we obtain an efficient two-signal equilibrium model in which earnings management and ownership retention go public acting as effective signals, conveying the information of IPO firm value to the market. This would help to transmit the IPO firm value in China stock market to rational investors, which in turn reinforces the equilibrium of the China stork market.