No abstract

We examine the role of earnings management by issuers prior to making initial public offerings (IPOs). Our results indicate that pre-IPO abnormal accruals are positively related to initial firm value. Entrepreneurs may seek to increase their offering proceeds, temporarily deceiving investors by opportunistically manipulating earnings through accruals management before going public. This would imply a negative relationship between abnormal accruals around the offer date and subsequent firm performance. Confirming earlier studies, we find that abnormal accruals during the offer year are significantly negatively related to subsequent firm stock returns. In addition, we find that abnormal accruals in the preceding year are also significantly negatively related to subsequent performance. Moreover, this result persists even for returns that are risk-adjusted using the multifactor CAPM of Eckbo, Masulis, and Norli (2000). Thus, it appears that aggressive pre-IPO earnings management both increases IPO proceeds and decreases subsequent returns to investors.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 132.

Abstract. This study examines empirically the role played by direct disclosure in the valuation of initial public offerings (IPOs). We investigate why some firms making an initial public offering in Canada inchide an eamings forecast in the offering prospectus and others do not, and, in particular, the role of such direct disciosures in IPO valuation. We explore several hypotheses motivated by the voluntary disclosure and signaling literatures. Our results are consistent with the hypotheses that (1) forecasters have "good news" to reveal about future eamings prospects relative to nonforecasters, (2) the earnings forecast signals are valuation relevant, and (3) the market is able to correct for expected forecast error or bias in the eamings forecast.Resume. Les auteurs font une analyse empirique du role que joue la presentation directe d'information dans revaluation des premiers appels publics a lepargne. Ils se penchent sur les raisoBS pour lesquelles certaines societes qui font appel public a I'epargne au Canada integrent a leiir prospectus d'emission des provisions de benefices, alors que d'autres ne le font pas, et ils s'interessent en particulier au role de la presentation directe de ce genre d'infomiation dans revaluation d'un premier appel public a I'epargne. Ils examinent plusieurs hypotheses inspirees d'ouvrages traitant de presentation volontaire d'information et d'indicateurs. Les resuitats obtenus sont conformes aux hypotheses selon lesqoeiles 1) ceux qui font etat de previsions ont de l'information positive a communiquer aa sujet des perspectives de benefices, contrairement a ceux qui ne font etat d'aucune prevision, 2) les indicateurs que representent les previsions de benefices sont pertinents a I'evalaatioE et 3) le tnarche a la capacite de corriger rinformation qu'il re^oit potir tenir compte des erreurs ou des distorsions anticipees dans les previsions de benefices. lotroduction Disclosure strategies and the valuation of initial public offerings are two areas of curreot interest in accounting and finance (e.g

No abstract