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Impact of IPO grading on earnings management

Author

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  • Yogesh Maheshwari
  • Khushbu Agrawal

Abstract

Purpose - – This paper aims to examine the impact of initial public offering (IPO) grading on earnings management by Indian companies in their IPOs. Specifically, it investigates whether earnings management significantly differs in the pre-IPO grading regime and post-IPO grading regime. Further, it examines whether earnings management significantly differs between high-graded and low-graded IPOs. Design/methodology/approach - – The cross-sectional modified Jones model is used to obtain the discretionary accruals, a proxy for earnings management. The impact of IPO grading on earnings management is assessed using multiple regression analysis. Findings - – Earnings management is significantly lower in graded IPOs as compared to the ones that are not graded. Further, among the graded IPOs, the high-graded IPOs exhibit lower earnings management as compared to the low-graded IPOs. The findings are robust to the use of an alternative measure for discretionary accruals. Originality/value - – IPO grading in India is a unique certification mechanism, introduced for the first time in any market. This paper establishes the efficacy of this mandatory certification mechanism in reducing earnings management. The findings could be valuable to issuer companies, investors and market regulators.

Suggested Citation

  • Yogesh Maheshwari & Khushbu Agrawal, 2015. "Impact of IPO grading on earnings management," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 13(2), pages 142-158, October.
    • Handle: RePEc:eme:jfrapp:v:13:y:2015:i:2:p:142-158
    DOI: 10.1108/JFRA-05-2013-0036
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    Cited by:

    1. Deepa Mangala & Mamta Dhanda, 2019. "Earnings Management and Performance of IPO Firms: Evidence from India," Indian Journal of Corporate Governance, , vol. 12(1), pages 39-58, June.
    2. Nikbakht, Ehsan & Sarkar, Sayan & Smith, Garrett C. & Spieler, Andrew C., 2021. "Pre-IPO earnings management: Evidence from India," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 44(C).

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