Zongye Huang

Yu you

Abstract：This paper develops a theoretical model that can accommodate the fact that entrepreneurs will behave accordingly given different firm size, technology, and financing decision. Allowing entrepreneurs to have access to equity market (the expansion of the NEEQ system) can decrease the chance of tax evasion and encourage true profits revealing, which make all market participants better off, including entrepreneurs, investors, and the government. Using the data of 9,455 listed firms on the NEEQ system from 2011 to 2016, we examine five hypotheses raised from our theoretical model and have the following findings. First, entrepreneurs would like to hide profits if they have no access to equity market. Second, the degree to which firms hide profits is positively correlated with the quality of firms. Third, the more profitable the firm is, the higher chance the firm can issue equity. Fourth, firms use equity financing in order to increase firm size and borrow more from banks. Last, firms will reveal true profits and pay higher taxes if they want to issue more equity after they are listed publicly.

Key words: Financial Market Reform; Entrepreneur Incentive; Equity Finance; The National Equities Exchange and Quotations System

JEL Classification: E22, G10