Interconnected Ownership and Earnings Management: Supplier-Customer Collusion in China’s IPO Context

1. Research Hypothesis & Overview

This dataset underpins an empirical study of how the supplier-customer ownership connections influence supplier firms’ earnings management in the pre-IPO period. The core hypothesis is that equity-based ownership ties between pre-IPO supplier firms and their major customers facilitate collusive behavior in the IPO process, leading to higher accrual-based earnings management before listing. We also examine whether regulators and investors recognize and discipline such behavior through IPO rejection, IPO pricing, and post-IPO stock performance.

The data structure (as detailed in the accompanying Data Guide) is a firm-year panel for Chinese IPO applicants from 2004–2017, covering the three fiscal years prior to the IPO application and subsequent IPO- and post-IPO-level outcomes.

2. Key Findings

The constructed variables support several main findings:

Pre-IPO earnings management: Firms with stronger ownership connections to their top five customers exhibit significantly higher pre-IPO abnormal accruals.

Regulatory discipline: The China Securities Regulatory Commission (CSRC) is more likely to reject IPOs when high earnings management coincides with strong supplier-customer ownership ties, suggesting regulators respond to the interaction of connections and manipulation.

Investor reaction: Ownership-connected supplier firms enjoy higher IPO price premiums but underperform in the long run, indicating that initial optimism is later revised.

Heterogeneity: The association between ownership connections and earnings management is stronger for firms without politically connected executives, firms in durable-goods industries, and firms in regions with weaker legal environments.

3. Data Collection Methodology

Data are assembled via a rigorous, multi-step process:

Sample and pre-IPO window: All firms that submitted domestic IPO applications between 2004 and 2017 are identified. For each, financial and governance data for the three pre-IPO fiscal years are collected.

Supplier-customer links and ownership ties: Top-five customers and their sales shares are hand-collected from IPO prospectuses (available for download at Juchao http://www.cninfo.com.cn/new/index). Ownership links between suppliers and customers are manually traced and coded based on data at Tianyancha (https://www.tianyancha.com).

This hand-collected approach to constructing the ownership-connection variable ensures that our measure accurately captures the underlying ownership structure along the supply chain for the sampled firms.

Financial, governance, and market variables: Accounting, governance, IPO outcome, pricing, and post-IPO return variables come from commercial databases (e.g.,China Stock Market & Accounting Research Database, WIND database).