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Are Accruals during Initial Public Offerings Opportunistic?

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Abstract

We find evidence that initial public offering (IPO) firms, on average, have high positive issue-year earnings and abnormal accruals, followed by poor long-run earnings and negative abnormal accruals. The IPO-year abnormal, and not expected, accruals explain the cross-sectional variation in post-issue earnings and stock returns. The results are robust with respect to alternative abnormal accruals and earnings performance measures. IPO firms adopt more income-increasing depreciation policies when they deviate from similar prior performance same industry non-issuers, and they provide significantly less for uncollectible accounts receivable than their matched non-issuers. The results taken together suggest opportunistic earnings management partially explains the new issues anomaly.

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Authors and Affiliations

  1. University of Michigan Business School, Ann Arbor, MI, 48109-1234

    Siew Hong Teoh

  2. Hong Kong University of Science and Technology, Hong Konh

    T. J. Wong

  3. Colonial Management Associates, Hong Kong

    Gita R. Rao

Authors
  1. Siew Hong Teoh
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  2. T. J. Wong
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  3. Gita R. Rao
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Teoh, S.H., Wong, T.J. & Rao, G.R. Are Accruals during Initial Public Offerings Opportunistic?. Review of Accounting Studies 3, 175–208 (1998). https://doi.org/10.1023/A:1009688619882

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