Are Accruals during Initial Public Offerings Opportunistic?
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
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.
- Aharony, Joseph, Chan-Jane Lin, and Martin Loeb. (1993). “Initial Public Offerings, Accounting Choices, and Earnings Management.” Contemporary Accounting Research 10, 61–81.
- Beneish, Messod. (1994). “The Detection of Earnings Manipulation.” Working paper, Duke University.
- ____. (1995). “Why Do Managers Overstate Earnings?” Working paper, Duke University.
- ____. (1997). “Detecting GAAP Violation: Implications for Assessing Earnings Management among Firms with Extreme Financial Performance.” Journal of Accounting and Public Policy 16, 271–309.
- Bowen, Robert, David Burghstahler, and Lane Daley. (1986). “Empirical Evidence on the Relationship between Earnings, Cash Flow, and Cash Flow Surrogates.” The Accounting Review 61, 713–725.
- Cheng, Li-Lan. (1995). “Equity Issue Underperformance and the Timing of Security Issues.” Working paper, Massachusetts Institute of Technology.
- Choi, Won, Jeffrey Gramlich, and Jacob Thomas. (1993). “Earnings Management in Response to the Book Income Adjustment of the Corporate Alternative Minimum Tax.” Working paper, Columbia University.
- DeAngelo, Linda. (1986). “Accounting Numbers as Market Valuation Substitutes: A Study of Management Buyouts of Public Shareholders.” Accounting Review 66, 400–420.
- ____. (1990). “Equity Valuation and Corporate Control.” Accounting Review 65, 93–112.
- Dechow, Patricia. (1994). “Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of Accounting Accruals.” Journal of Accounting and Economics 17, 3–42.
- Dechow, Patricia, Richard Sloan, and Amy Sweeney. (1995). “Detecting Earnings Management.” The Accounting Review 70, 193–225.
- DeFond, Mark, and James Jiambalvo. (1994). “Debt Covenant Violation and Manipulation of Accruals.” Journal of Accounting and Economics 17, 145–176.
- Friedlan, John. (1994). “Accounting Choices by Issuers of Initial Public Offerings.” Contemporary Accounting Research 11, 1–31.
- Gaver, Jennifer, Kenneth Gaver, and Jeffrey Austin. (1995). “Additional Evidence on the Association between Income Management and Earnings-based Bonus Plans.” Journal of Accounting and Economics 19, 3–28.
- Guay, Wayne, S. P. Kothari, and Ross Watts. (1996). “A Market-based Evaluation of Abnormal Accrual Models.” Journal of Accounting Research Supplement 34, 83–105.
- Guenther, David. (1994). “Earnings Management in Response to Corporate Tax Rate Changes: Evidence from the 1986 Tax Reform Act.” Accounting Review 69, 230–243.
- Hand, John. (1989). “Did Firms Undertake Debt-equity Swaps for an Accounting Paper Profit or True Financial Gain?” The Accounting Review 64, 587–623.
- Hanley, Kathleen, A. Kumar, and Paul Seguin. (1993). “Price Stabilization in the Market for New Issues.” Journal of Financial Economics 34, 177–197.
- Healy, Paul. (1985). “The Effect of Bonus Schemes on Accounting Choices.” Journal of Accounting and Economics 7, 85–107.
- ____. (1996). “Discussion of a Market-based Evaluation of Discretionary Accrual Models.” Journal of Accounting Research Supplement 34, 107–115.
- Holthausen, Robert, David Larcker, and Richard Sloan. (1995). “Annual Bonus Schemes and the Manipulation of Earnings.” Journal of Accounting and Economics 19, 29–74.
- Jones, Jennifer. (1991). “Earnings Management during Import Relief Investigation.” Journal of Accounting Research 29–2, 193–228.
- Kaplan, Robert. (1985). “Comments on Paul Healy: Evidence on the Effect of Bonus Schemes on Accounting Procedure and Accrual Decisions.” Journal of Accounting and Economics 7, 109–113.
- Kreutzfeldt, R., and Wanda Wallace. (1986). “Error Characteristics in Audit Populations: Their Profile and Relationship to Environmental Factors.” Auditing: A Journal of Practice and Theory 6, 20–43.
- Liberty, Susan, and Jerold Zimmerman. (1986). “Labor Union Contract Negotiations and Accounting Choices.” Accounting Review 61, 692–712.
- Loughran, Timothy, and Jay Ritter. (1995). “The New Issues Puzzle.” Journal of Finance 50, 23–52.
- McNichols, Maureen, and Peter Wilson. (1988). “Evidence of Earnings Management from the Provision of Bad Debts.” Journal of Accounting Research Supplement 26, 1–31.
- Moyer, Susan. (1990). “Capital Adequacy Ratio Regulations and Accounting Choices in Commercial Banks.” Journal of Accounting and Economics 13, 123–154.
- Narayanan, M. P. (1985). “Managerial Incentives for Short-term Results.” The Journal of Finance 60, 1469–1484.
- Neill, John, Susan Pourciau, and Thomas Schaefer. (1995). “Accounting Method Choice and IPO Valuation.” Accounting Horizons 9–3, 68–80.
- Perry, Susan, and Thomas Williams. (1994). “Earnings Management Preceding Management Buyout Offers.” Journal of Accounting and Economics 18, 157–180.
- Pourciau, Susan. (1993). “Earnings Management and Non-routine Executive Changes.” Journal of Accounting and Economics 16, 150–180.
- Rao, Gita. (1993). “The Relation between Stock Returns and Earnings: A Study of Newly-Public Firms.” Working paper, Kidder Peabody and Company.
- Ritter, Jay. (1991). “The Long-Run Performance of Initial Public Offerings.” Journal of Finance 66, 3–27.
- Stein, Jeremy. (1989). “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 655–669.
- Subramanyam, K. R. (1996). “The Pricing of Abnormal Accruals.” Journal of Accounting and Economics 22, 249–281.
- Teoh, Siew Hong, Ivo Welch, and T. J. Wong. (1998a). “Earnings Management and the Long-term Underperformance of Initial Public Stock Offerings.” Journal of Finance 53, 1935–1974.
- ____. (1998b). “Earnings Management and the Post-Issue Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics 50, 63–99.
- Teoh, Siew Hong, and T. J. Wong. (1998). “Analysts' Credulity about Reported Earnings and Overoptimism in New Equity Issues.” Review of Financial Studies, forthcoming.
- Are Accruals during Initial Public Offerings Opportunistic?
Review of Accounting Studies
Volume 3, Issue 1-2 , pp 175-208
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links