Skip to main content
SpringerLink
Log in

Group affiliation and earnings management of Asian IPO issuers

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

We study how group affiliation, a firm being a member of a business group, affects earnings management around initial public offerings (IPOs) in nine Asian countries. Our empirical evidence shows that Asian IPO issuers tend to manage earnings more aggressively than matching non-IPO firms from the same industry: discretionary accruals are higher by 3 % of total assets. Earnings management is especially pronounced among the quartile of IPO firms with the highest dependence on external capital. However, group-affiliated issuers have substantially lower levels of earnings management compared to non-group issuers (discretionary accruals are lower by 6.8 % of total assets), even when their dependence on external capital is high. Our results suggest that group-affiliated IPO issuers in Asia can raise funds more easily than non-group issuers, and as a result they have a lower need to manipulate earnings. We also find a negative relation between underwriter reputation and earnings management, which suggests that reputable underwriters help certify the validity of information disclosure for IPOs.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. An alternative explanation put forward by Fan (2007), amongst others, is that IPO issuers engage in earnings management to signal future prospects and the quality of the IPO firm.

  2. External financing has both benefits and disadvantages for group-affiliated firms. Potential benefits include increasing the amount of funds available for investment and increased opportunities for expropriation and tunneling among group firms. Disadvantages of external finance include (partial) loss of control and increased scrutiny by outside investors. If group firms decide to raise funds through an IPO the perceived benefits evidently outweigh the costs.

  3. The Worldscope cutoff date for the fiscal year-end is 15 January. For example, data of firms with fiscal year ending on 31 March 2005, 30 June 2005, and 30 September 2005, are all classified as 2005 data. Worldscope does not provide data based on calendar years. Further, because quarterly accounting data are not available for a considerable number of firms, consistent adjustments using quarterly data are not feasible. Most IPO studies using Worldscope data, such as Doidge et al. (2011) and Kim and Weisbach (2008), therefore use the fiscal year-end figures provided by Worldscope.

  4. An important distinction is that Kim and Yi (2006) consider all Korean listed firms, and not just IPOs.

References

  • Aharony J, Lee CJ, Wong TJ (2000) Financial packaging of IPO firms in China. J Account Res 38:103–126

    Article  Google Scholar 

  • Ahmad-Zaluki NA, Campbell K, Goodacre A (2011) Earnings management in Malaysian IPOs: the east Asian crisis, ownership control, and post-IPO performance. Int J Account 46:111–137

    Article  Google Scholar 

  • Akerlof GA (1970) The market for “Lemons”: quality uncertainty and the market mechanism. Q J Econ 84:488–500

    Article  Google Scholar 

  • Almeida H, Wolfenzon D (2006) Should business groups be dismantled? The equilibrium costs of efficient internal capital markets. J Financ Econ 79:99–144

    Article  Google Scholar 

  • Bae KH, Kang JK, Kim JM (2002) Tunneling or value added? Evidence from mergers by Korean business groups. J Financ 57:2695–2740

    Article  Google Scholar 

  • Berle AA, Means GC (1932) Modern corporation and private property. Macmillan, New York

    Google Scholar 

  • Bertrand M, Mehta P, Mullainathan S (2002) Ferreting out tunneling: an application to Indian business groups. Q J Econ 117:121–148

    Article  Google Scholar 

  • Boulton TJ, Boulton T, Smart SB, Zutter CJ (2011) Earnings quality and international IPO underpricing. Account Rev 86:483–505

    Article  Google Scholar 

  • Carter RB, Manaster S (1990) Initial public offerings and underwriter reputation. J Financ 45:1045–1067

    Article  Google Scholar 

  • Carter RB, Dark FH, Singh AK (1998) Underwriter reputation, initial returns, and the long run performance of IPO stocks. J Financ 53:285–311

    Article  Google Scholar 

  • Chang SC, Chung TY, Lin WC (2010) Underwriter reputation, earnings management and the long-run performance of initial public offerings. Account Financ 50:53–78

    Article  Google Scholar 

  • Chemmanur TJ, Fulghieri P (1994) Investment bank reputation, information production, and financial intermediation. J Financ 49:57–79

    Article  Google Scholar 

  • Chen JJ, Cheng P, Xiao X (2011) Related party transactions as a source of earnings management. Appl Financ Econ 21:165–181

    Article  Google Scholar 

  • Chen C, Shi H, Xu H (2013) Underwriter reputation, issuer ownership, and pre-IPO earnings management: Evidence from China. Financ Manage 42:647–677

    Article  Google Scholar 

  • Claessens S, Djankov S, Lang LHP (2000) The separation of ownership and control in East Asian corporations. J Financ Econ 58:81–112

    Article  Google Scholar 

  • Claessens S, Fan JPH, Lang LHP (2006) The benefits and costs of group affiliation: Evidence from East Asia. Emerg Mark Rev 7:1–26

    Article  Google Scholar 

  • Dechow PM, Sloan RG, Sweeney AP (1995) Detecting earnings management. Account Rev 70:93–225

    Google Scholar 

  • Dewenter K, Novaes W, Pettway RH (2001) Visibility versus complexity in business groups: evidence from Japanese keiretsu. J Bus 74:79–100

    Article  Google Scholar 

  • Doidge C, Karolyi GA, Stulz RM (2011) The U.S. left behind: the rise of IPO activity around the world. NBER Working Paper 16916

  • Dong M, Michel JS, Pandes JA (2011) Underwriter quality and long-run IPO performance. Financ Manage 40:219–251

    Article  Google Scholar 

  • Ducharme LL, Malatesta PH, Sefcik SE (2001) Earnings management: IPO valuation and subsequent performance. J Account Audit Financ 16:369–396

    Google Scholar 

  • Ducharme LL, Malatesta PH, Sefcik SE (2004) Earnings management, stock issues, and shareholder lawsuits. J Financ Econ 71:27–49

    Article  Google Scholar 

  • Fan Q (2007) Earnings management and ownership retention for initial public offering firms: theory and evidence. Account Rev 82:27–64

    Article  Google Scholar 

  • Fan JPH, Wong TJ (2002) Corporate ownership structure and the informativeness of accounting earnings in East Asia. J Account Econ 33:401–425

    Article  Google Scholar 

  • Ferris SP, Kim KA, Kitsabunnarat P (2003) The costs (and benefits?) of diversified business groups: the case of Korean chaebols. J Bank Financ 27:251–273

    Article  Google Scholar 

  • Gao Y (2010) What comprises IPO initial returns: evidence from the Chinese market. Pac Basin Financ J 18:77–89

    Article  Google Scholar 

  • Gopalan R, Nanda V, Seru A (2007) Affiliated firms and financial support: evidence from Indian business groups. J Financ Econ 86:759–795

    Article  Google Scholar 

  • Hansen RS, Torregrosa P (1992) Underwriter compensation and corporate monitoring. J Financ 47:1537–1555

    Article  Google Scholar 

  • Hoshi T, Kashyap A, Scharfstein A (1991) Corporate structure, liquidity, and investment: evidence from Japanese industrial groups. Q J Econ 106:33–60

    Article  Google Scholar 

  • Jaggi B, Chin CL, Lin HWW, Lee P (2006) Earnings forecast disclosure regulation and earnings management: evidence from Taiwan IPO firms. Rev Quant Financ Acc 26:275–299

    Article  Google Scholar 

  • Jelic R, Saadouni B, Briston R (2001) Performance of Malaysian IPOs: underwriters reputation and management earnings forecasts. Pac Basin Financ J 9:457–486

    Article  Google Scholar 

  • Jones JJ (1991) Earnings management during import relief investigations. J Account Res 29:193–228

    Article  Google Scholar 

  • Kao J, Wu D, Yang Z (2009) Regulations, earnings management, and post-IPO performance: the Chinese evidence. J Bank Financ 33:63–76

    Article  Google Scholar 

  • Khanna T, Palepu K (2000) Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. J Financ 55:867–891

    Article  Google Scholar 

  • Khanna T, Yafeh Y (2005) Business groups and risk sharing around the world. J Bus 78:301–340

    Article  Google Scholar 

  • Khanna T, Yafeh Y (2007) Business groups in emerging markets: paragons or parasites? J Econ Lit 45:331–372

    Article  Google Scholar 

  • Kim W, Weisbach MW (2008) Motivations for public equity offers: an international perspective. J Financ Econ 87:281–307

    Article  Google Scholar 

  • Kim JB, Yi CH (2006) Ownership structure, business group affiliation, listing status, and earnings management: evidence from Korea. Contemp Account Res 23:427–464

    Article  Google Scholar 

  • Kothari SP, Leone AJ, Wasley CE (2005) Performance matched discretionary accrual measures. J Account Econ 39:163–197

    Article  Google Scholar 

  • La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW (1997) Legal determinants of external finance. J Financ 52:1131–1150

    Article  Google Scholar 

  • La Porta R, Lopez-de-Silanes F, Shleifer A (1999) Corporate ownership around the world. J Financ 54:471–517

    Article  Google Scholar 

  • La Porta R, Lopez-de-Silanes F, Zamarripa G (2003) Related lending. Q J Econ 118:231–268

    Article  Google Scholar 

  • Lee G, Masulis RW (2011) Do more reputable financial institutions reduce earnings management by IPO issuers? J Corp Financ 17:982–1000

    Article  Google Scholar 

  • Leuz C, Nanda D, Wysocki PD (2003) Earnings management and investor protection: an international comparison. J Financ Econ 69:505–527

    Article  Google Scholar 

  • Megginson WL, Weiss KA (1991) Venture capitalist certification in initial public offerings. J Financ 46:879–903

    Article  Google Scholar 

  • Morsfield SG, Tan CEL (2006) Do venture capitalists influence the decision to manage earnings in initial public offerings? Account Rev 81:1119–1150

    Article  Google Scholar 

  • Nagata K, Hachiya T (2007) Earnings management and the pricing of initial public offerings. Rev Pac Basin Financ Mark Pol 10:541–559

    Article  Google Scholar 

  • Petersen MA, Rajan RG (1994) The benefits of lending relationships: evidence from small business data. J Financ 49:3–37

    Article  Google Scholar 

  • Rajan RG, Zingales L (1998) Financial dependence and growth. Am Econ Rev 88:559–586

    Google Scholar 

  • Shen Z, Coakley J, Instefjord N (2014) Earnings management and IPO anomalies in China. Rev Quant Financ Acc 42:69–93

    Article  Google Scholar 

  • Shleifer A, Vishny RW (1997) A survey of corporate governance. J Financ 52:737–783

    Article  Google Scholar 

  • Stulz RM (1988) Managerial control of voting rights: financing policies and the market for corporate control. J Financ Econ 20:25–54

    Article  Google Scholar 

  • Su C, Bangassa K (2011) The impact of underwriter reputation on initial returns and long-run performance of Chinese IPOs. J Int Financ Mark Inst Money 21:760–791

    Article  Google Scholar 

  • Sullivan MJ, Unite AA (2001) The influence of group affiliation and the underwriting process on emerging market IPOs: the case of the Philippines. Pac Basin Financ J 9:487–512

    Article  Google Scholar 

  • Teoh S, Welch I, Wong TJ (1998a) Earnings management and the subsequent market performance of initial public offerings. J Financ 53:1935–1974

    Article  Google Scholar 

  • Teoh S, Welch I, Rao GR (1998b) Are accruals during initial public offerings opportunistic? Rev Account Stud 3:175–208

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. College of Management, Mahidol University, 69 Vipawadee Rangsit Road, Bangkok, 10400, Thailand

    Roy Kouwenberg & Pipat Thontirawong

  2. Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, The Netherlands

    Roy Kouwenberg

Authors
  1. Roy Kouwenberg
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Pipat Thontirawong
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Roy Kouwenberg.

Appendix

Appendix

See Table 7 for summary statistics regarding the number of IPOs excluded from the sample because of missing Worldscope accounting data.

Table 7 Summary statistics of IPOs without discretionary current accruals data
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Kouwenberg, R., Thontirawong, P. Group affiliation and earnings management of Asian IPO issuers. Rev Quant Finan Acc 47, 897–917 (2016). https://doi.org/10.1007/s11156-015-0524-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-015-0524-2

Keywords

JEL Classification

Search

Navigation