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

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 (DCA 0 ) 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 DCA 0 ) 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.

Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings

“…While a number of studies have documented that IPO firms engaged in aggressive earnings management during a pre-IPO period in order to inflate income, other studies do not support this finding. Different views are provided by researchers such as Armstrong et al (2008), Ball and Shivakumar (2008), Chou et al (2009), Fan (2007), Premti (2013), and Alsultan (2017) who found that firms did not engage in earnings management in the year before the IPO or the year of going public. Similarly, in the context of SEO, a high level of information asymmetry in the SEO event provides an opportunity for managers to manipulate earnings upward to maximize offering proceeds.…”

Manajemen Laba pada Periode Initial Public Offering dan Dampaknya pada Persistensi Laba

“…Penelitian sebelumnya telah dilakukan untuk mengetahui apakah terjadi manajemen laba di sekitar periode IPO dan menemukan bahwa tidak adanya manajemen laba yang signifikan sebelum periode IPO dan manajemen cenderung konservatif dalam menyajikan laporan keuangan pada prospektus. (Ball & Shivakumar, 2008), (Premti, 2013), (Teoh et al, 1998) dan (Widyaningtyas, 2009). Penelitian terdahulu juga menunjukkan bahwa manajemen laba lebih signifikan dilakukan pada periode IPO karena manajemen memiliki insentif untuk mempertahankan harga saham selama lock-up period dan untuk menghindari risiko litigasi jika terjadi penurunan laba dan harga saham yang signifikan pada periode IPO (Alhadab et al, 2015), (Premti, 2013), dan (Teoh et al, 1998).…”

“…Tidak ditemukan manajemen laba akrual pada periode sebelum IPO yang signifikan yang bertujuan untuk meningkatkan laba seperti pandangan pada umumnya. Premti (2013) melakukan penelitian terhadap manajemen laba sebelum periode IPO dan pada periode IPO terhadap 4962 sampel perusahaan yang berasal dari 28 negara yang berbeda. Penelitian ini hanya mengukur manajemen laba menggunakan discretionary accrual saja.…”

Earnings Management and New Listings: Evidence from Vietnam

“…One view provides strong empirical evidence that some firms manipulate accruals aggressively or earnings upward around new issuance (Ahmad-Zaluki, 2008;Chiraz, 2013;DuCharme et al, 2004;Gresse & Gajewski, 2006;Li et al, 2005;Mangala & Dhanda, 2019;Nuryaman, 2013;Roosenboom et al, 2003;Teoh et al, 1998aTeoh et al, , 1998b. Different views are provided by researchers such as Beaver et al (2000), Qintao (2007), Ball and Shivakumar (2008), Armstrong et al (2008), Premti (2013), and Chou et al (2009) which show no evidence of earnings signals around new issuance.…”

“…Several international studies have documented the existence of earnings management surrounding new issuance. Results of these studies illustrate the contrast among levels of accruals earnings management ranging from very aggressive (such as Aharony et al, 1993;DuCharme et al, 2004;Friedlan, 1994;Kao et al, 2009;Nuryaman, 2013;Rangan, 1998;Shivakumar, 2000;Teoh et al, 1998aTeoh et al, , 1998b to no earnings management (such as Armstrong et al, 2008;Ball & Shivakumar, 2008;DuCharme et al, 2001;Premti, 2013) to no earnings management (such as DuCharme et al, 2001;Ball & Shivakumar, 2008;Armstrong et al, 2008;Premti, 2013). Review of the earnings management around issuance of equity and new listings indicates that while earnings management during issuance of equity is fully documented, the study on accruals earnings management and new listings is not strong enough.…”