Earnings Management and Delisting Risk of Initial Public Offerings

Earnings management and performance of French IPO companies

“…Consistent with literature (Keloharju, 1993;Goergen et al, 2007), we document statistically significant (at the 0.01 level) and positive relationship between the IPO size (LnMCap) and the three-year post-IPO abnormal return BHAR, suggesting that larger the IPO company size the lesser is the long-run underperformance. Regarding the variable profitability (Prof), the coefficient estimate of 0.901 is positive and is significant at the 0.05 level indicating that more profitable companies in the IPO year, are more performing in the long-run (Fama and French, 2004;Li et al, 2006). Table 4 indicates that ex-ante uncertainty (Ex-ante) has a negative and significant (at the 0.10 level) influence on long-run performance.…”

“…With a sample of IPOs from 1980 to 1999, Li et al (2006) find that the degree of earnings management possesses significant predictive power on IPO failure. They find companies associated with aggressive earnings management are more likely to delist for performance failure, and tend to delist sooner.…”

“…Given that earnings management have detrimental impact on the firm and shareholders in the post-IPO phase, good companies with solid earnings and prospects have lower incentives to manipulate accounting numbers. Thus, the degree of earnings management in the IPO process should decrease with the quality of IPO, while the quality of IPO is inversely related to future delisting risk (Li et al, 2006). Hence the following hypothesis; H4: French IPO companies in which managers engage in aggressive earnings management are more likely to be involuntarily delisted from the stock exchanges.…”

“…According to previous studies, we expect that worst performing and failed IPOs in the long term are those who are young (Ritter, 1991;Demers and Joos, 2007;Li et al, 2006), small (Keloharju, 1993;Goergen et al, 2007), highly leveraged (Eckbo and Norli, 2005;Demers and Joos, 2007;Li et al, 2006) and less profitable (Fama and French, 2004;Li et al, 2006) at the IPO time.…”

“…Prior studies report that IPOs manage their earnings aggressively and opportunistically through income-increasing accruals to increase offering proceeds in the IPO year. But they may face poor post-IPO stock returns (PastorLlorca and Poveda-Fuentes, 2006;DuCharme et al, 2001DuCharme et al, , 2004Roosenboom et al, 2003;Teoh et al, 1998a;Ahmad-Zaluki et al, 2011) and they are more likely to delist for performance failure (Li et al, 2006). Of more, IPO companies that manage their earnings aggressively also put too high a price on the new issues, thereby leading to a decrease in the degree of underpricing (Kim and Park, 2005;Kimbro, 2005).…”