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Industry-Average Earnings Management and IPO Pricing

Author

Listed:
  • Joseph R. Rakestraw

    (Florida Atlantic University, School of Accounting, 119 Kaye Hall, 777 Glades Road, Boca Raton, FL 33431, USA)

  • Raman Kumar

    (Virginia Tech, 1016 Pamplin Hall, Blacksburg, VA 24061, USA)

  • John J. Maher

    (Virginia Tech, 3007 Pamplin Hall, Blacksburg, VA 24061, USA)

Abstract

We examine the effects of signed industry-average earnings management on the pricing of initial public offerings (IPOs). We posit that the variation in an IPOs earnings management is related to industry-average earnings management and, therefore, provides useful information regarding the IPO valuation. We find that higher industry-average earnings management negatively affects the pre-issuance price update and the initial return of IPOs. Our findings lend support to the partial adjustment phenomenon of IPO pricing which suggests information that influences valuation is partially incorporated in the initial offer price and more fully incorporated in the share price during the first-day of secondary market trading.

Suggested Citation

  • Joseph R. Rakestraw & Raman Kumar & John J. Maher, 2019. "Industry-Average Earnings Management and IPO Pricing," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-46, December.
    • Handle: RePEc:wsi:rpbfmp:v:22:y:2019:i:04:n:s0219091519500231
    DOI: 10.1142/S0219091519500231
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