ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

An Empirical Study on Financial Features and Earnings Management of Backdoor Listing Companies

  • Sea-Yeon Kim Department of Accounting, Graduate School, Soongsil University

Asian Tax Journal Vol. 14 No. 2 (2013), pp. 9-46

Abstract

A backdoor listing(“BDL” hereinafter) means the way that an unlisted company(“UL” hereinafter) enters capital markets such as KSE or KOSDAQ without any IPO process. Although there are both positive and negative effects of BDL theoretically as well as practically, the Korean Financial Supervisory Service(“KFSS” hereinafter) has tightened regulations on BDL. Recently, KFSS is enacting UL who tries BDL to receive an audit by the accountant designated by KFSS, because they suspect that UL who tries BDL does not have accounting transparency. This study examine whether the recent regulation of KFSS is justified on an empirical evidences by analysing BDL companies' various financial features and earnings management. Firstly, this study examined financial features of participants of BDL(pearl companies and shell companies). Secondly, we compared earnings management of BDL companies with that of direct listing(“IPO” hereinafter) companies or the other UL. we also analyzed earnings management of prior periods to BDL. Finally, this study tested the relation between earnings management before the BDL and accounting or market performance after the BDL. This study found that pearl companies and shell companies had worse financial status and operation results at prior fiscal year to BDL than compared group(directly listed companies and the other KOSDAQ companies, respectively). Also, we found assets, sales, incomes and important financial ratios of BDL companies have decreased after the BDL. In addition, this study found that BDL companies did more earnings management than IPO companies or the other UL, and BDL companies with more aggressive earnings management have achieved lower financial performance after the BDL. In sum, this study provides empirical evidence on validity of the KFSS's new regulation, and also provides useful information to investors which consider investment on BDL companies.

Keywords

  • Backdoor Listing
  • IPO Process
  • Accounting Transparency
  • Earnings Management
  • Unlisted Company

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