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Earnings Management Prior to Initial Public Offerings and Its Effect on Firm Performance: International Evidence

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  • Arjan Premti

Abstract

This paper investigates the degree of discretionary current accruals (DCA-1) prior to the initial public offerings (IPOs) of foreign firms in an attempt to study the two seemingly opposing views of Teoh, Welch, and Wong (1998) and Ball and Shivakumar (2008) in regards to pre-IPO earnings management. By analyzing a sample of 4962 IPOs from 28 countries, I find that, on average, IPO firms do not report significantly positive DCA-1. This result supports the view held by Ball and Shivakumar that IPO firms do not engage in earnings management and it is inconsistent with the earnings management hypothesis of Teoh et al. (1998). Furthermore, results support the criticism of Ball and Shivakumar (2008) that the use of discretionary accruals in the IPO year (DCA0) is a biased measure of earnings management. However, consistent with the hypothesis of Teoh et al. (1998), results show that firms with higher discretionary accruals (DCA-1 or DCA0) underperform in the long run. The negative relationship between the long-term performance and the level of DCA is robust to several measures of long-term performance (cumulative abnormal returns-CAR, buy-and-hold abnormal returns-BHAR, Fama-French 4-factor model-Alpha), to several time horizons (3 and 5 years), and holds even after controlling for several firm characteristics. Overall, the results show that although on average IPO firms don¡¯t engage in earnings management, the ones that do, underperform in the long run.

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  • Arjan Premti, 2013. "Earnings Management Prior to Initial Public Offerings and Its Effect on Firm Performance: International Evidence," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 4(3), pages 10-24, July.
    • Handle: RePEc:jfr:ijfr11:v:4:y:2013:i:3:p:10-24
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    References listed on IDEAS

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    Cited by:

    1. Premti, Arjan & Smith, Garrett, 2020. "Earnings management in the pre-IPO process: Biases and predictors," Research in International Business and Finance, Elsevier, vol. 52(C).
    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).
    3. Chi Duong Thi, 2023. "Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings," SAGE Open, , vol. 13(2), pages 21582440231, June.

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