An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Joseph Aharony
Tel Aviv University

Jiwei Wang
Singapore Management University

Hongqi Yuan
Shanghai University of Finance and Economics

Abstract: Using related party transactions (RPTs) between 185 Chinese IPOs during 1999-2001 and their parent companies, we provide strong evidence on a link between the "real" means used by parent company managers to manipulate the earnings of their newly issued firms in the pre-IPO period, and their motivation for this opportunistic behavior - tunneling economic resources in the post-IPO period. We show that investors in Chinese IPOs fail to immediately see through such an association. This evidence suggests that earnings manipulation in the pre-IPO period is motivated by tunneling behavior in the post-IPO period.

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