When and why do IPO firms manage earnings?

Sletten, Ewa; Ertimur, Yonca; Sunder, Jayanthi; Weber, Joseph

doi:10.1007/s11142-018-9445-3

Cited by 39 publications

(26 citation statements)

References 55 publications

(106 reference statements)

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“…More specifically, this study sheds light on the debate about earnings management around IPO (e.g., Darrough and Rangan 2005;Katz 2009;Cecchini et al 2012;Wongsunwai 2013;Armstrong et al 2016;Fedyk et al 2017;Sletten et al 2018). While prior literature has consensus that IPO firms have higher discretionary accruals at the year of IPO, there is mixed evidence whether they have abnormally high discretionary accruals before IPO (Ball and Shivakumar 2008;Venkataraman et al 2008;Sletten et al 2018). We fill this gap in the literature by providing empirical evidence about the likelihood of restatements of pre-IPO financials.…”

Section: Introductionmentioning

confidence: 93%

“…Prior accounting literature suggests that substantial earnings management occurs before IPO (Aharony et al 1993;Friedlan 1994;Teoh et al 1998a;Teoh et al 1998b;Morsfield and Tan 2006;Wongsunwai 2013;Sletten et al 2018). The incentive to overstate earnings is greater for managers of IPO firms because higher reported earnings help them have a successful debut in the public equity market.…”

Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

“…On the one hand, IPO firms are likely to engage in opportunistic misreporting to make their IPO succeed and maximize cash inflow from equity financing. Consistent with this motive, prior literature has been building a pile of empirical evidence on abnormal discretionary accruals of IPO firms (e.g., Darrough and Rangan 2005;Katz 2009;Wongsunwai 2013;Sletten et al 2018). On the other hand, IPO firms have incentives to keep a high quality of financial reporting.…”

Section: Introductionmentioning

confidence: 96%

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Restatements for Pre-IPO Financial Statements.

Jang¹

2020

Preprint

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This study examines the likelihood of restatements for the financial statements disclosed before the initial public offerings (IPO) and the nature of these misstated financial statements. We find that before the IPO date, IPO firms are more likely to issue materially misstated financial statements than other public firms. Compared to the other IPO issuers, firms that restate their pre-IPO financials exhibit higher discretionary accruals and experience severe IPO underpricing. Also, the stock market reacts more negatively to the restatement announcements for pre-IPO financials than those of other public firms. Overall, our findings indicate that IPO firms are likely to issue misstated financial statements to succeed in their public debuts and equity financing.

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Section: Introductionmentioning

confidence: 93%

Section: Prior Literature and Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 96%

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Restatements for Pre-IPO Financial Statements.

Jang¹

2020

Preprint

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“…Additionally, they show that public companies have enhanced accounting quality due to the market and regulatory effects on the financial reporting of these firms. More recently, Sletten et al (2018) examine the timing and motivations more closely using quarterly data. They find that the earnings management only happens in the quarter before and the quarter of the lockup expiration.…”

Section: Accounting Role In Financing Decisionsmentioning

confidence: 99%

Reporting matters: the real effects of financial reporting on investing and financing decisions

Shakespeare

2020

Accounting and Business Research

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In this paper, I provide an overview of the research on the real effects of financial reporting on investing and financing decisions made by firms. Accounting can improve investment efficiency and affect nearly every aspect of the financing decision by reducing information asymmetry and improving monitoring. However, limitations in the financial reporting system, specifically distinguishing liabilities from equity and determining control for consolidations, result in opportunities to structure transactions to achieve certain financial reporting outcomes. A recent new stream of research documents a link between accounting and macroeconomic indicators, providing evidence that accounting predicts revisions in these indicators. An interesting avenue for future research could be to investigate the link between accounting, investing and financing, and macroeconomic performance.

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“…Ascioglu, Hegde, Krishnan, and Mcdermott (2012) show that the use of such practices is influenced by the firms' liquidity. Sletten, Ertimur, Sunder, and Weber (2018) argue that a rise of capital at the initial public offering and the large-scale exit, by pre-initial public offering shareholders at lockup expiration which is calculated to approximately 180 days later, create incentives for firms to manage earnings. According to Miloud (2013), when the aim of earnings management is to increase the attractiveness of the offered shares, it needs to go undetected by market participants.…”

Section: Literature Reviewmentioning

confidence: 99%

Earnings Management in State-Owned Enterprises in a Period of Macroeconomic Instability

Balios¹,

Sdrolias²,

Thanos³

2020

JMAA

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The purpose of this paper is to examine whether and to what extend Greek state-owned enterprises engage in earnings management techniques during 2012-2016. Most prior studies on earnings management have used data from large economies with relative stable macroeconomic contexts (e.g., USA). Our knowledge about earnings management in smaller economies is rather limited. To fill this void, we conducted our study in Greece and focused on the abovementioned period, which is very interesting given that Greece experienced a substantial political and macroeconomic instability (e.g., four elections, one referendum, capital controls, and two memorandums). Two different models (i.e., The Earnings Distribution Model and the Modified Jones Model) are used to provide answers to the research questions. The sample is composed of 50 state-owned enterprises. The results show that Greek state-owned enterprises did not adopt any earnings management techniques during the examined period. These results are rather robust given that they come from two different models. According to the literature, macroeconomic and political instability provide incentives to managers to use earnings management techniques. Interestingly though, our results suggest that this is not the case for a smaller economy. The findings of this study will allow investors, auditors, and users of the financial statements to make better decisions when studying companies that are experiencing those difficulties. The adoption of two different methods and the similar results is an indication of more robust and valid findings.

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When and why do IPO firms manage earnings?

Cited by 39 publications

References 55 publications

Restatements for Pre-IPO Financial Statements.

Restatements for Pre-IPO Financial Statements.

Reporting matters: the real effects of financial reporting on investing and financing decisions

Earnings Management in State-Owned Enterprises in a Period of Macroeconomic Instability

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