Earnings Management, IPO Underpricing, and Post-Issue Stock Performance of Chinese SMEs

This article empirically examines the association between earnings management and initial public offering (IPO) performance (underpricing and post-issue stock performance) of Chinese small and medium enterprises (SMEs). The analysis is based on a sample of 464 IPOs listed on the Shenzhen Stock Exchange (SZSE) SME board during 2006–2010. Consistent with our expectations, this article finds that a higher level of total discretionary accruals prior to the IPO is associated with a higher level of underpricing and poorer long-term stock performance. However, when total discretionary accruals are decomposed into current and long-term accruals, the associations are insignificant. The results are robust with respect to several alternative measures of earnings management and stock performance. Statistics also show, on average, Chinese SMEs have positive 3-year long-term stock returns relative to various benchmarks, and only firms with income-increasing accruals suffer long-term underperformance. Findings from this article add important new evidence to the literature as Chinese SME IPOs tend to perform differently compared with main board firms, likely because of their unique features.