Stable suppliers and real earnings management: empirical evidence from private placements

Abstract

ABSTRACTThis study uses text analysis to extract stable supplier information from company annual reports and discusses its impact on the real earnings management strategies used during a private placement period. The results show that companies with stable suppliers conducted more downward real earnings management prior to a private placement than those without such suppliers to form collaborative relationships with suppliers for earnings management. The suppliers mainly assisted majority shareholders in tunnelling, conducting covert methods such as share price discounts and offering cash dividends. This could be driven by the prospect of obtaining more purchases from the company following the private placement. This study is the first to explore how stable suppliers assist companies in conducting real earnings management and majority shareholders with asset tunnelling. The findings contribute to the research on the economic consequences of supplier relationships and the influencing factors of equity financing and real earnings management.

Keywords

• Private placements
• stable suppliers
• real earnings management
• majority shareholder tunnelling