Real and Accrual Earnings Management around IPOs: Evidence from US Companies
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Studies examined accrual earnings management activities around IPOs found that IPO firms reported significant abnormal discretionary accruals around IPO periods. Incentives and opportunities of accrual-based earnings management (AEM) have also been documented. Also, real activities manipulation (REM), which is defined as firms' deviation from normal business practices, is widely studied in recent earnings management literature. REM has been studied in settings such as around zero earnings threshold, SEOs, as well as meeting or beating analysts' earnings forecasts. However, REM around IPOs is still an area needed to be examined. The purpose of this study is to examine the presence of REM of IPO firms utilizing the cross-sectional regressions on each industry-year (Roychowdhury, 2006). The real activities examined in this paper include sales manipulation, reduction of discretionary expenses and overproduction. The results show that IPO firms have significantly negative abnormal cash flows from operations and significantly positive abnormal production costs in the IPO year. The findings suggest that IPO firms not only manipulate accruals to inflate reported earnings, but also engage in real activities manipulation. In studying the determinants of earnings management activities, results show that IPO firms' decisions to manipulate earnings in the IPO year is positively related to the amounts of IPO proceeds and negatively related to the underwriters' reputation rankings and the presence of venture capital. However, in the tradeoff between AEM and REM, little evidence of the tradeoff has been found.
Accounting and Finance Association of Australia and New Zealand Conference 2012
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