In China, there are strict regulations on Initial Public Offering (IPO) pricing. The IPO price is the product of earning per share (EPS) and a P/E ratio predetermined by the Chinese Securities Regulatory Commission (CSRC). During the period of this study (1992-1998), the regulations on IPO pricing had been changed twice, from using the forecasted EPS to past three-year average EPS, and then changed back to the forecasted EPS. It is interesting to investigate the relationships among these changes, earnings management and earnings forecast disclosure. My findings show that using past three-year average EPS to set the IPO price may be an additional incentive for earnings management, but the evidence is not very strong. The research also investigates whether the forecasted EPS disclosed in...[ Read more ]

In China, there are strict regulations on Initial Public Offering (IPO) pricing. The IPO price is the product of earning per share (EPS) and a P/E ratio predetermined by the Chinese Securities Regulatory Commission (CSRC). During the period of this study (1992-1998), the regulations on IPO pricing had been changed twice, from using the forecasted EPS to past three-year average EPS, and then changed back to the forecasted EPS. It is interesting to investigate the relationships among these changes, earnings management and earnings forecast disclosure. My findings show that using past three-year average EPS to set the IPO price may be an additional incentive for earnings management, but the evidence is not very strong. The research also investigates whether the forecasted EPS disclosed in the prospectus or public announcement can be realized under different regulations. However, the result is not significant .