Journal of Economics and Finance

, Volume 34, Issue 3, pp 229–256

The economic profitability of pre-IPO earnings management and IPO underperformance


DOI: 10.1007/s12197-008-9056-0

Cite this article as:
Xiong, Y., Zhou, H. & Varshney, S. J Econ Finan (2010) 34: 229. doi:10.1007/s12197-008-9056-0


The purpose of this paper is to test the market performance of a zero-investment trading strategy based on the knowledge of IPO underperformance and estimates of pre-IPO earnings management. This trading strategy is implemented by forming two-firm portfolios that take short positions in the IPOs and long positions in control firms matched by industry and market capitalization. The first test shows that significant positive abnormal returns can be earned trading on the knowledge of IPO underperformance. However, the relationship between the level of abnormal returns and the level of pre-IPO earnings management is not found to be significant. Overall, our results suggest that existent pre-IPO earnings management plays important roles although investors may not sophisticated enough to measure the level of earnings management.


Market PerformanceZero-Investment StrategyInitial Public OfferingEarnings ManagementUnderperformance

JEL Classification


Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.College of Business AdministrationCalifornia State University—SacramentoSacramentoUSA
  2. 2.Department of Accounting and Business Law, College of Business AdministrationThe University of Texas—Pan AmericanEdinburgUSA