Participants in Private Placement and Earnings Management-Evidence from China

Private placements have become popular after the split share structure reform in China, yet earnings management behaviors are not fully analyzed in private placement. Controlling shareholders of Chinese listed companies always invest in private placement, whereas U.S. firms make private placements to passive investors. This paper divided Chinese private placements into two groups: one group's investors are controlling shareholders (group 1), and the other group's investors are institutions (group 2). The Difference-in-Difference (DID) Model was used to detect the impact of private placement on the earnings management of Chinese listed companies. The results showed that income-decreasing earning management before the issuance year was significant in group 1, whereas income-increasing earning management was significant in group 2. Furthermore, the earnings management decreased sharply after the issuance in group 2. According to the results, regulators should pay more attention to earnings management behaviors in private placements, especially to those in private placements issued to controlling shareholders. And also, outside investors must evaluate companies with private placement carefully.