Are Accruals during Initial Public Offerings Opportunistic?

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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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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Keywords

  • Stock Return
  • Earning Management
  • Initial Public Offering
  • Initial Public
  • Prior Performance