The sharpest tool in the shed: IPO financial statement management of STEM vs. non-STEM firms
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The valuation of STEM (science, technology, engineering, and math) firms has recently gained attention in the literature. Research has shown that, for valuation of STEM firms, accounting items such as sales growth and R&D expenditures matter more than bottom-line earnings. We examine whether, around the time of the IPO, STEM managers apply discretion over the accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in valuing STEM firms and that managers respond by managing those items rather than bottom-line earnings as in prior research. We find that future stock returns of STEM firms are negatively associated with sales management and not with abnormal accruals as for non-STEM firms. Our results illuminate the differential behavior of STEM managers and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.
KeywordsSTEM firms Initial public offering Discretion over accounting items IPO valuation Earnings management
JEL classificationM13 M41 K22 G14 G32
We are grateful for the insightful suggestions we received from Patricia Dechow (the editor). We would also like to thank two anonymous reviewers, the 2012 annual conference on Financial Economics and Accounting participants, and seminar participants at Arizona State University, Stanford University, University of San Francisco, and University of Washington at Bothell for their comments and suggestions.
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