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a b s t r a c tUsing a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999-2001, we show that related-party (RP) sales of goods and services could be used opportunistically to manage earnings upwards in the pre-IPO period. We also provide evidence that such behavior may be motivated by the prospect of tunneling opportunities in the post-IPO period, i.e., exploiting economic resources from minority shareholders for the benefit of the parent company. We provide evidence of one such opportunistic tunneling tool: non-repayment by Chinese parent companies of net outstanding corporate loans made to them by their newly listed subsidiaries. Furthermore, we provide evidence in support of our assertion of an association between such tunneling behavior in the post-IPO period and earnings management via abnormal RP sales in the pre-IPO period. Finally, we demonstrate the apparent failure of investors in Chinese IPOs to perceive the link between the two phenomena. The results enhance 0278-4254/$ -see front matter Ó journal homepage: www.elsevier.com /locate/jaccpubpol understanding of the motives for and consequences of earnings manipulation during the IPO process. They highlight a potential additional investment risk facing foreign investors in China's capital markets as well as in Chinese firms cross-listed in non-Chinese stock exchanges, and have policy implications for China and other emerging markets which need to improve the protection of minority shareholders' rights.

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Abstract. This paper investigates whether entrepreneurs manipulate earnings in the periods prior to taking their flrms public through the choice of accounting conventions. The preponderance of evidence, using powerful accrual tests that were able to detect earnings management in other contexts, indicates little, if any, manipulation. To the extent that there is earnings management, the results suggest that this phenomenon is more pronounced among small firms and among firms with large finandal leverage and is to a lesser degree related to the quality of the underwriters and auditors employed when going public.Resume. Les auteurs ont voulu savoir si les entrepreneurs manipulaient les b£n€fices dans les exerdces pr£c^dant un appel public It l'^pargne par le truchement du choix des normes et conventions comptables. La preponderance des preuves recueillies h l'aide des puissantes techniques existantes de sondage des produits et des charges visant k d^celer les cas d'« accommodation » des b^n^fices dans d'autres contextes, revile une faible manipulation, sinon aucune. Dans la mesure oi) il y a accommodation des b^n^-fices, les resultats obtenus donnent It penser que le ph^nom^ne est davantage accentud chez les entreprises de petite taille ou dont le levier finander est ^lev^, et qu'il est reli6 de fa^on plus t^nue It la quality des preneurs fermes et des verificateurs k qui l'entrepdse a recours lorsqu'elle fait appel public h r^pargne.This study examines whether entreprenetirs systematically select accounting methods to increase reported income in the periods prior to going public. Asymmetry of information between the entrepreneur and outside investors concerning the value of initial public offerings (IPOs) is well recognized (e.g., Leland and Pyle

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Motivated by the European Union (EU) decision to mandate application of the International Financial Reporting Standards (IFRS) to the consolidated financial statements of all EU listed firms (Regulation (EC) 1606/2002), starting in December 2005, we compare the value relevance of accounting information in 14 European countries in the year prior to and the year of the mandatory adoption of the IFRS. We focus on three accounting information items for which measurements under IFRS are likely to differ considerably from measurements under domestic accounting practices across the EU countries prior to the introduction of the international standards: goodwill, research and development expenses (R&D), and asset revaluation. These three items, selected on an a priori basis, have been shown in previous research to differ in the effect of uncertainty on their future benefits. We use valuation models that include these three variables and in addition the book value of equity and earnings. Overall, our study suggests that the adoption of the IFRS has increased the value relevance of the three accounting numbers for investors in equity securities in the EU. Association tests support our two hypotheses: (1) in the year prior to the mandatory adoption of the IFRS, the incremental value relevance to investors of the three domestic GAAP-based accounting items was greater in countries where the respective domestic standards were more compatible with the IFRS; and (2) the higher the deviation of the three domestic GAAP-based accounting items from their corresponding IFRS values, the greater the incremental value relevance to investors from the switch to IFRS. These associations prevail when considering cross-country differences in the institutional environments, which tend to provide complementary effects.

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