SENSITIVITY TEST

For the robust test, this paper selects eleven firms whose DAs are positive in year –1 and are negative from year 1 to year 3. Among the eleven firms, we choose the four firms with the highest DAs as the high sub-sample and the four firms with the lowest DAs as the low sub-sample. This paper uses the Wilcoxon Rank Sum test to investigate the difference between the high and low sub-samples. The empirical results are shown in Table 6. In comparison with the low sub-sample, the high sub-sample has lower QFII ownership ratio under the 5% significance level. Also, the high sub-sample has larger offering ratio under the 10% significance level. The empirical results support our expectations and previous results that firms with higher information asymmetry and larger depositary receipt offering size tend to manage earnings.

Table 6: Result of Wilcoxon Rank Sum Test of High and Low Sub-sample Wilcoxon Rank Sum value High Low Significance level

QFII i 10 26 5 %

Xi 24 12 10 %

(WL, WH, α)= （11, 25, 5%）

(WL, WH, α)= （12, 24, 10%）

WL=small observation critical value for two-tailed test (observation number=4) WH=large observation critical value for two-tailed test (observation number=4) α=significance level

Tsai and Li Earnings management incentive of initial depositary receipt offerings 175

VII. CONCLUSIONS

Pre-issue earnings management has been widely discussed, but the incentive has not been well discussed as of yet. In this paper, we study the incentive of depositary receipt pre-issue earnings management and the effect of pre-issue earnings management on depositary receipt performance. This study initially measures the time-series pattern of DAs for firms of initial depositary receipt offerings. The results show that the DA reaches the highest value for one year prior to depositary receipt issue. Also, depositary receipt issuers report the EPS in excess of cash flow per share during the depositary receipt issue period. This implies the pre-issue managed earnings with increasing DAs.

Additionally, these results show that pre-issue DA is negatively related to the qualified foreign institutional investor ownership ratio, and pre-issue DA is positively associated with the depositary receipt offering ratio. Since information asymmetry appears higher between foreign investors and management for firms with lower qualified foreign institutional investor holdings, the incentive of earnings management increases.

Also, when the firms plan to raise more capital from depositary receipts, they have more incentive of earnings management to smooth depositary receipt offerings. Information asymmetry and offering interests contribute to earnings management of initial depositary receipt offerings. On the other hand, the probit model demonstrates the robust results that discretionary accrual reversal is related to qualified foreign institutional investor ownership ratio and depositary receipt offering ratio, respectively. The firms with stronger earnings incentive have greater post-issue DA reversals.

In addition, this paper examines post-issue depositary receipt underperformance.

Also, the results indicate that depositary receipt issuers with higher DAs have poorer depositary receipt return performance in the subsequent periods after depositary receipt issues. These findings suggest the inability of foreign investors to fully understand managerial earnings choices. Because they behave as if they are fixated on the high earnings, they are disappointed later. Moreover, the results further report the significant relations between post-issue depositary receipt performance and incentive factors.

In summary, firms with higher information asymmetry and firms that raise more capital from depositary receipt offerings have more incentive to engage in pre-issue earnings management. As a result, depositary receipts of these firms perform poorer and have post-issue DA reversals.

(Submitted December 2002; accepted March 2004)

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首次發行存託憑證前盈餘管理動機之 研究

蔡璧徽