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When And Why Do Ipo Firms Manage Earnings
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Book Synopsis When and Why Do IPO Firms Manage Earnings? by : Yonca Ertimur
Download or read book When and Why Do IPO Firms Manage Earnings? written by Yonca Ertimur and published by . This book was released on 2017 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is significant disagreement about whether, when and why IPO firms manage earnings. We contribute to the literature by precisely identifying the timing and motives behind earnings management by IPO firms. We emphasize that the period around IPO is characterized by two distinct events: the IPO itself and the lockup expiration. Both the raising of capital at the IPO and the large-scale exit by pre-IPO shareholders at lockup expiration approximately 180 days later create incentives for firms to manage earnings. To disentangle the effect of these events, we examine quarterly, rather than annual, abnormal accruals. We find no evidence of income-increasing earnings management before the IPO. However, IPO firms exhibit positive abnormal accruals in the quarter before and the quarter of the lockup expiration. Positive abnormal accruals are concentrated in less scrutinized firms and firms with high expected selling by pre-IPO shareholders. Our results hold after controlling for the investment of IPO proceeds in the working capital and suggest that the positive abnormal accruals in the IPO year and long-run IPO underperformance documented by Teoh, Welch and Wong (1998) are attributable to earnings management around lockup expiration.
Book Synopsis Essays on IPO-firm Earnings Management by : Scott N. Bronson
Download or read book Essays on IPO-firm Earnings Management written by Scott N. Bronson and published by . This book was released on 2006 with total page 136 pages. Available in PDF, EPUB and Kindle. Book excerpt: PART 1 This paper provides evidence on the timing of earnings management behavior for initial public offering (IPO) firms in the annual periods surrounding the offering. It also examines whether this behavior is related to CEO and CFO trading after the offering. Using discretionary accruals as my proxy for earnings management, I find that, for firms that file a new 10-K before the trading restrictions provided in underwriter lockup agreements end, average IPO-firm discretionary accruals are significantly positive in the first 10-K filed after the offering, and that these discretionary accruals are significantly larger than those in the offering prospectus. I also find a positive relation between CEO and CFO trading activity and discretionary accruals for the same group of companies. Taken together, the results suggest that earnings management behavior is more prevalent in the first 10-K filed than in the offering prospectus, that it is concentrated in the firms that file this 10-K before their lockup period expires, and that it is positively related to CEO and CFO trading after the offering. PART 2 This paper examines whether earnings management behavior has decreased in the period following the passage of the Sarbanes-Oxley Act of 2002 (SOX) for IPO firms. It also explores how any changes I observe for IPOs relate to any changes that have occurred for the broader set of public companies. I find that IPO firms have experienced a significant decrease in earnings management after the passage of SOX. The results also provide evidence that this decrease is driven by the smallest public companies. While pre-SOX discretionary accruals for IPO firms are larger than those for non-IPO firms, I find that the post-SOX decrease in discretionary accruals results in the level of IPO-firm discretionary accruals becoming indistinguishable from that of non-IPO firms. Finally, the evidence suggests that the characteristics of post-SOX offerings are different from those of pre-SOX offerings, and that the decrease in discretionary accruals in the post-SOX period remains after controlling for these changes.
Book Synopsis Incentives and Opportunities for Earnings Management in Initial Public Offerings by : Siew Hong Teoh
Download or read book Incentives and Opportunities for Earnings Management in Initial Public Offerings written by Siew Hong Teoh and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines accounting earnings and the associated accrual and cash flow components in the years surrounding an initial public offering (IPO) to study the incentives and opportunities for firms to manage earnings when going public. We identify firm and offering characteristics that may be related to the amount of earnings management in IPO firms. We find that age and ownership retention by original entrepreneurs are significantly negatively related to industry-adjusted discretionary accounting accruals. In addition, we find that net income and cash flow from operations increase in the fiscal year prior to the IPO, and decline significantly in the year of the IPO. Net income continues to decline subsequently but not cash flows. Discretionary working capital and total accruals in the year of the IPO are negatively related to future cash flows and the change in net income between the pre-and post-IPO period. Taken together, the evidence is consistent with a scenario where firms either time an IPO immediately after a year of unusually high cash flow or boost cash flows right before the IPO, and then use accounting accruals to sustain reported net income in the year of the IPO. Thus, the evidence is consistent with the IPO firm attempting to manage investor perceptions with discretionary accruals.
Book Synopsis Earnings Management and Delisting Risk of Initial Public Offerings by : Jinliang Li
Download or read book Earnings Management and Delisting Risk of Initial Public Offerings written by Jinliang Li and published by . This book was released on 2010 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: Earnings management is a corporate decision subject to costs. Both earnings management in the IPO process and the ex ante delisting risk of newly issued firms are related to firm fundamentals. With a sample of IPOs from 1980 to 1999, we find that the degree of earnings management possesses significant predictive power on IPO failure. IPO firms associated with aggressive earnings management are more likely to delist for performance failure, and tend to delist sooner. Furthermore, we find that IPO firms associated with conservative earnings management are more likely to be merged or acquired and they earn positive abnormal returns. Our results also show that IPO issuers manage earnings in response to market demand. Market-wide earnings management of IPO firms interacts with the IPO cycle documented by Lowry and Schwert (2002).
Book Synopsis Do Cross-Border Listing Firms Manage Earnings Or Seize a Window of Opportunity by : Gordian A. Ndubizu
Download or read book Do Cross-Border Listing Firms Manage Earnings Or Seize a Window of Opportunity written by Gordian A. Ndubizu and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Firms raising new equity capital at cross-listing (IPO) and those cross-listing existing home-country public shares (non-IPO) benefit from earnings that are high when they cross-list on U.S. stock exchanges. IPO firms have greater benefits than non-IPO firms because they receive cash infusion at listing. I find that performance (ROA) and cash flows peak at cross-listing period for all cross-border firms. Using a matched-firm research design to control for industry and performance, the results suggest that both IPO and non-IPO firms time cross-listing when performance is peaking (seize a window of opportunity). Further tests investigate whether IPO or non-IPO firms differ in their incentives to engage in earnings management at the time of cross-listing. The results suggest that both appear to engage in the same level of earnings management at the time of cross-listing. This suggests that incentives to boost earnings to obtain higher cash infusion are not the main motivation for the earnings management observed. Other incentives, such as greater investor recognition could be a stronger motivation.
Book Synopsis Earnings Management Implications of Decisions by IPO Firms to Issue Forecasts by : Denis Cormier
Download or read book Earnings Management Implications of Decisions by IPO Firms to Issue Forecasts written by Denis Cormier and published by . This book was released on 1993 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Earnings Management and the Long-Term Market Performance of Initial Public Offerings by : Siew Hong Teoh
Download or read book Earnings Management and the Long-Term Market Performance of Initial Public Offerings written by Siew Hong Teoh and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine empirically whether earnings management as measured by discretionary accounting accruals explain post-issue stock return underperformance for IPO firms. We find that high discretionary accounting accruals are related to negative abnormal stock returns with high statistical significance. For example, a trading strategy of a short position in IPO firms with high discretionary accruals and a long position in IPOs with low discretionary accruals result in a mean (median) excess return of 102% (83.5%) in the 36-month period beginning after the first fiscal year end of the IPO. The evidence is consistent with Ritter's [1991] conjecture that investors are systematically overoptimistic about the growth prospects of IPO firms. The high discretionary accounting accruals seem to be associated with initial overoptimism of investors with subsequent revelations about the appropriateness of the accruals causing a subsequent downward revision in stock prices.
Book Synopsis Real and Accrual Earnings Management and IPO Failure Risk by : Mohammad Alhadab
Download or read book Real and Accrual Earnings Management and IPO Failure Risk written by Mohammad Alhadab and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes the relationship between real and accrual earnings management activities and IPO failure risk. Recent research shows that IPO firms manage earnings upward around the offer year utilizing real and accrual earnings management activities (e.g., Wongsunwai, 2012) and that these activities have severe negative consequences for future stock returns and operating performance (e.g., Cohen and Zarowin, 2010; Kothari et al., 2012). Thus, we predict IPO firms that engaged in higher levels of real and accrual earnings management will exhibit a higher probability of failure and lower survival rates. We test this hypothesis based on a sample of 570 IPO firms that went public over the period 1998-2008. We find evidence that IPO firms manipulate earnings upward utilizing real and accrual earnings management around the IPO. We also find that IPO firms with higher levels of real and accrual earnings management during the IPO year have a higher probability of IPO failure and lower survival rates in subsequent periods.
Book Synopsis Earnings Management, IPO Underpricing, and IPO Underperformance by : Yan Xiong
Download or read book Earnings Management, IPO Underpricing, and IPO Underperformance written by Yan Xiong and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Do Venture Capitalists Constrain or Encourage Earnings Management in Initial Public Offerings by : Suzanne G. Morsfield
Download or read book Do Venture Capitalists Constrain or Encourage Earnings Management in Initial Public Offerings written by Suzanne G. Morsfield and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines whether venture capitalists (VCs) provide value-added monitoring by constraining IPO-related earnings management in their portfolio firms. Finance theoretical literature is mixed as to its characterization of whether venture capitalists reduce principal-agent conflicts through their unique contracting, information collection, monitoring, and support skill/opportunity sets, or whether VCs have incentives to exploit their unique skills and proximity to firm management at the expense of other investors. Little empirical research has focused to date on identifying observable and measurable tests of specific elements of the perceived VC governance skills or incentives set on the actual market value of the firms in their investment portfolios. Earnings management around an IPO is a context where we may be able to both observe and quantify the impact of these perceived skills and incentives. Consistent with the current accounting theory of earnings management detection, we focus on a specific capital markets context where the use of inappropriate earnings-increasing discretionary accruals is expected - i.e., the initial public offering (IPO) setting. We find evidence that abnormal discretionary accruals are significantly lower and that long-run returns are significantly higher for VC-backed IPO firms relative to a matched sample of non-VC-backed IPO firms - these findings suggest that VCs behave more like principals than agents in this context. We also provide evidence that the direction of the discretionary accruals (i.e., income-increasing versus income-decreasing) is important when attempting to understand both the presence and determinants of earnings management in an IPO context. When positive and negative accruals are examined separately, VC presence is related to lower income-increasing discretionary accruals. We find no association between VC presence and income-decreasing accruals. Our results are robust to alternative variable specifications, and to controls for IPO market cycles and IPO lockup provisions.
Book Synopsis Incentives and Opportunities for Earnings Management in Initial Public Offerings by :
Download or read book Incentives and Opportunities for Earnings Management in Initial Public Offerings written by and published by . This book was released on 1994 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Earnings Forecasts Disclosure Regulation and Earnings Management by IPO Firms by : Bikki Jaggi
Download or read book Earnings Forecasts Disclosure Regulation and Earnings Management by IPO Firms written by Bikki Jaggi and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines whether a regulation on mandatory disclosure of earnings forecasts encourages managers to issue more optimistic earnings forecasts, and whether the optimistic forecasts are revised downward or the reported earnings are managed upward using discretionary accruals to reduce the forecast error. Additionally, it evaluates how investors react to earnings management and forecast revisions. The study is based on 760 forecasts issued by Taiwan IPO firms from 1991 to 2000 after the regulation to issue the earnings forecasts was imposed by the Taiwan Securities and Futures Exchange Commission (TSFEC) and it also uses a sample of 86 IPO firms prior to the issue of regulation. The results show that the IPO firms issue more optimistic forecasts than conservative forecasts. They adjust their reported earnings of optimistic forecasts upward with discretionary accruals more than revising the earnings forecasts downward, whereas they revise conservative forecasts upward more than adjusting the reported earnings downward. The results on the comparative analysis of earnings management by IPO firms before and after issuance of the TSFEC regulation provide additional support to the findings that earnings management by IPO firms increased significantly after the regulation was imposed. The results on investors' reaction to reported earnings show that investors reacted positively to higher reported earnings compared to the last revision of forecasts and they ignored the upward adjustment of reported earnings. Their reaction has been negative to downward revisions and positive to upward revisions.
Book Synopsis Financial Packaging of IPO Firms in China by : Joseph Aharony
Download or read book Financial Packaging of IPO Firms in China written by Joseph Aharony and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the earnings patterns of initial public offering (IPO) firms in China to shed light on the role of earnings management in the quot;financial packagingquot; of Chinese state-owned enterprises (SOEs) for public listing. We base our analysis on the case of B-Shares and H-Shares in China, two types of securities that now allow foreign investors to buy shares in SOEs previously wholly owned by the state. These IPOs mark the beginning of the stock market in China and signify an important step of Chinese economic reform. We examine the pre- and post-IPO earnings patterns for the entire sample, and separately for firms in protected vs. unprotected industries and for B-Shares vs. H-Shares. We find a statistically significant post-issue earnings decline for unprotected industry firms. This earnings decline is most significant for unprotected B-Share firms, and marginally significant for protected B-Share and unprotected H-Share firms, but not significant for protected H-Share firms. In addition, we find some evidence that the accounting accruals of sample firms in unprotected industries decline whereas their cash flows from operations increase after the IPO. Taken together, earnings management in the process of financial packaging seems to depend on the firm's relationship with the central government and on where the securities are listed. The evidence also suggests that the SOEs in unprotected industries may manage accounting accruals to boost earnings and/or list those business units with temporarily high profits resulting from high accounting accruals during the process of financial packaging.
Book Synopsis Earnings Management Around Secondary Equity Offerings by Insiders by : Chi Keung Man
Download or read book Earnings Management Around Secondary Equity Offerings by Insiders written by Chi Keung Man and published by . This book was released on 2017 with total page 2 pages. Available in PDF, EPUB and Kindle. Book excerpt: The problem is author cannot isolate IPO incentives for earnings management (Hughes, 1986, Clarkson et al., 1992; Teoh, Welch, and Wong, 1998a, b; Heron and Lie, 2004; Ball and Shivakumar's, 2008) because managers do manage earnings upwards before IPO and later downward after IPO. If managers avoid litigation from shareholders, they can choose not to manage earnings rather than managing less earnings. If investors think they may be misled about firm value, they can ask lower share price and managers do not need manage earnings. I think it should provide more evidence to persuade me. Of course, DuCharme et al. (2004) provide evidence that firms with upward earnings management face higher litigation risk. But, they can choose not to manage earnings so as to not face this litigation risk. However, the researchers argue that managers even manage earnings downwards to avoid. It is another matter because litigation risk can deter firms managing upward EM but does not mean they need to manage down. It needs to provide more prior works to show that firms with higher litigation risk are likely to manage earnings downwards. It is reasonable for firms managing upward after SEO.
Book Synopsis Earnings Management and Long-run Post-issue Performance of IPOs in India by : Mamta Dhanda
Download or read book Earnings Management and Long-run Post-issue Performance of IPOs in India written by Mamta Dhanda and published by . This book was released on 2020 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: The controversies surrounding accounting figures bring forth the downgraded quality of financial statements in India. Opportunistic management of earnings at the cost of stakeholders' interest requires prompt regulatory measure as they may become grave in high profile corporate events like mergers and public issues. Focusing on one of the most important mega events of initial public offerings (IPOs) the present study evaluates the accounting figure of IPOs that came out during April 2010 to March 2013. The study measures pre and post issue earnings management for a time span of 11 years from April 2008 to March 2019 and post issue long run earnings and stock performance using Modified Jones Model (1995) for a time span of seven years including issue year and six post issue years. The study provides evidence of earnings management by Indian IPO firms and post issue earnings and stock underperformance due to reversal of discretionary current accruals of issue year. The study emphasizes on better monitoring and regulatory environment and precise definition of accounting choices to control managed accounts to avoid frequent fraud incidents.
Book Synopsis Earnings Management and Ownership Retention for Initial Public Offering Firms by : Qintao Fan
Download or read book Earnings Management and Ownership Retention for Initial Public Offering Firms written by Qintao Fan and published by . This book was released on 2009 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates, both theoretically and empirically, how earnings management and ownership retention interact, and how these two jointly affect the equilibrium market valuation of IPO firms in the presence of information asymmetry. Analytically, this paper extends the univariate signaling framework of Leland and Pyle (1977) and derives an efficient signaling equilibrium in which both reported earnings and ownership retention are endogenously chosen to convey the IPO issuer's private information. It is shown that even though either ownership retention or reported earnings communicates the issuer's type to the market unambiguously, the issuer will strategically employ both signals to achieve separation from potential lower quality imitators at minimal cost. Comparative statics analysis shows that the trade-off between the two signals depends critically on the uncertainty over future earnings. The theoretical analysis generates several empirical implications regarding market efficiency, IPO pricing, and the strategic choice of earnings management. Through systematic econometric analysis, I confirm the major predictions of the model.
Book Synopsis Venture Capital and Earnings Management in IPOs by : Sabrina Ozawa Gioielli
Download or read book Venture Capital and Earnings Management in IPOs written by Sabrina Ozawa Gioielli and published by . This book was released on 2013 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate earnings management (EM) in IPOs and the role of private equity/venture capital (PEVC) in hampering such practice. We show that in terms of EM, PEVC and non-PEVC-sponsored firms should be treated as different samples: when we split the sample, R-squared increases drastically for both subsamples. EM in PEVC-sponsored IPOs is marginal while in non-PEVC-sponsored ones it is large. For PEVC-sponsored IPOs, the phases of the IPO are only marginally significant to explain EM while firms' characteristics are highly statistically significant. In contrast, for non-PEVC-sponsored ones, the phases of the IPO are highly statistically significant and firms' characteristics are only marginally statistically significant. Finally, only for PEVC-sponsored IPOs the reputation of the auditor is important to explain EM. This suggests that either auditors are more effective to control EM in those firms or, alternatively, that the choice of auditor is more meaningful for PEVC-sponsored firm, suggesting that the choice of a highly reputed auditor is a compromise not to manage earnings.
