Do initial public offering firms manage accruals? Evidence from individual accounts

Cecchini, Mark; Jackson, Scott B.; Liu, Xiaotao

doi:10.1007/s11142-011-9160-9

Cited by 49 publications

(18 citation statements)

References 33 publications

(53 reference statements)

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“…Our findings for NEWECON firms contrast with analyses indicating that the abnormal accruals reported by OLDECON IPO firms do not positively influence investors' pricing of the offering and do not link to increased litigation risk. This is consistent with recent work documenting that the average IPO firm reports conservatively (Ball and Shivakumar ; Venkataraman, Weber, and Willenborg ; Cecchini, Jackson, and Liu ) and also supports the notion that IPO reporting does not typically trigger post‐IPO consequences (DuCharme et al. ).…”

Section: Introductionsupporting

confidence: 91%

“…; Cecchini et al. ). If, as these studies suggest, the fear of punishment does indeed scare off most attempts to manipulate IPO earnings, it is not clear that managers' acquiescence is warranted.…”

Section: Background Related Literature and Hypothesesmentioning

confidence: 99%

“…; Armstrong, Foster, and Taylor ; Cecchini et al. ). Similarly, mixed results were obtained for IPO valuation analyses.…”

Section: Background Related Literature and Hypothesesmentioning

confidence: 99%

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When Does Pre‐IPO Financial Reporting Trigger Post‐IPO Legal Consequences?

Billings

Lewis-Western

2015

Contemporary Accting Res

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Prior research suggests that the fear of litigation precludes most managers from manipulating earnings in the initial public offering (IPO) setting. Yet, managers' restraint is perhaps unwarranted: research has not yet linked instances of aggressive pre-IPO reporting to increased litigation risk. This paper investigates when aggressive IPO reporting triggers legal consequences. Examining 2,037 IPOs, we find that even when ex post evidence indicates the presence of earnings inflation, litigation is more likely to occur when investors have relied on the suspect earnings during the pricing process. Why might investors rely on some firms' abnormal accruals when valuing the IPO and yet discount the abnormal accruals of other firms? Our analyses suggest that IPO investors incorporate abnormal accrual information into IPO prices in situations where accruals are more likely to reflect information and where other sources of information to help investors make pricing decisions are lacking or are less reliable. In these situations, we find that abnormal accruals do positively correlate with future performance, validating investors' use of this information when pricing these offerings. Yet, when ex post performance reveals that these pre-IPO abnormal accruals were in fact inflated, we find that litigation emerges to allow harmed shareholders to recover losses incurred dating back to the pricing process-importantly, investors are only harmed if they used those abnormal accruals in pricing the IPO. Collectively, our evidence indicates that litigation in response to earnings inflation does indeed surface in the IPO setting-but only when investors need it to settle the score.

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Section: Introductionsupporting

confidence: 91%

Section: Background Related Literature and Hypothesesmentioning

confidence: 99%

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When Does Pre‐IPO Financial Reporting Trigger Post‐IPO Legal Consequences?

Billings

Lewis-Western

2015

Contemporary Accting Res

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“…Cecchini et al. () examine the allowance for uncollectable accounts and bad debt expenses and find evidence that IPO firms manage earnings downward using more decreasing allowances. Moreover, Ball and Shivakumar () examine accrual accounting during the year prior to the IPO for 171 UK IPOs, which have similar information and financial report characteristics and prospectuses, over the period 1995–1999.…”

Section: Related Literature and Hypotheses Developmentmentioning

confidence: 99%

A Comparative Analysis of Real and Accrual Earnings Management around Initial Public Offerings under Different Regulatory Environments

Alhadab¹,

Clacher²,

Keasey

2016

Business Fin & Account

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While earnings management around IPOs has been researched in a number of settings, there has been a relative absence of work that analyses the impact of the regulatory environment on such activities. We find that the regulatory environment does impact the real and accrual earnings management activities of IPO firms. Our results show that IPO firms listing on the lightly regulated UK Alternative Investment Market (AIM) have higher (lower) levels of accrual‐based and sales‐based (discretionary expenses‐based) earnings management around the IPO than firms listing on the more heavily regulated Main market in the UK.

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“…2 Cecchini et al, 2012). In contrast, reverse merger, as an alternative way of going public, does not raise capital by issuing stocks.…”

Section: Accepted Manuscriptmentioning

confidence: 99%

Accrual-based and real activity earnings management at the back door: Evidence from Chinese reverse mergers

Zhu

Shan

et al. 2015

Pacific-Basin Finance Journal

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Do initial public offering firms manage accruals? Evidence from individual accounts

Cited by 49 publications

References 33 publications

When Does Pre‐IPO Financial Reporting Trigger Post‐IPO Legal Consequences?

When Does Pre‐IPO Financial Reporting Trigger Post‐IPO Legal Consequences?

A Comparative Analysis of Real and Accrual Earnings Management around Initial Public Offerings under Different Regulatory Environments

Accrual-based and real activity earnings management at the back door: Evidence from Chinese reverse mergers

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