Earnings management and listing day performance of IPOs in India

Abstract

PurposeThe purpose of this study is to examine the influence of earnings management during initial public offerings on the listing day returns.Design/methodology/approachThe study collected data for 511 Indian IPOs that came between April 2003 and March 2019 for calculating earnings management. On the basis of the Cross Sectional Modified Jones Model 1995, the paper presents three proxies of earnings management as discretionary accruals (DA), discretionary current accruals (DCA) and discretionary long-term accruals (DLA). The study further used correlation and multiple regression analysis to assess the impact of earnings management on listing day returns.FindingsThe findings show that earnings management and listing day returns vary through issue-year and industry-type. Apart from it, the study reveals a greater contribution of short-term accruals in earnings management on the basis of higher DCA values. It also discloses that the aggregate level of earnings management (DA) influences listing returns, whereas DCA and DLA separately have no impact on the listing day returns of the Indian IPOs.Research limitations/implicationsThe findings are useful to potential investors and analysts to observe, assess and understand the quality of financial reports that are based on fallacious disclosure of accounting figures. The study also reflects the efficacy of Indian regulatory norms for IPOs in constraining earnings management and underpricing, thus providing meaningful insight to the policy makers and the regulators.Originality/valueThis study is distinguished by its focus on determining the influence of earnings management on listing day returns in Indian IPOs by using three earnings management proxies.

CSR disclosure and state ownership: implications for earnings management and market value

“…, 2015; Cohen and Zarowin, 2010; Kim et al. , 2012; Mangala and Dhanda, 2022). Earnings management may help managers to meet or exceed analysts' forecasts, obtain improved compensation (Athanasakou et al.…”

IPO performance anomaly: evidence from new aged ventures and loss-making listings in India

“…Therefore, the high price paid for IPO rarely gets rewarded with accounting or market rate of returns (Brycz et al, 2018). The pre-listing valuation manipulation attempts are in vain in elevating the IPO's long-term performance (Brycz et al, 2018;Mangala and Dhanda, 2022;Wang and Wang, 2021). The artificially inflated returns, allied to pre-IPO earnings management attempts, tend to normalize and adjust to a firm's real potential in the long run (Borghesi and Pencek, 2013;Nikbakht et al, 2021;Pandey and Pattanayak, 2022;Shen et al, 2014).…”

“…Studies document the sizeable impact of media (Guldiken et al, 2017;Keel et al, 2021;Li et al, 2021b), disclosures and management tone (Bian et al, 2021;Carey et al, 2016) and numerous JAMR 21,3 quantitative and qualitative factors on post-IPO performance. IPO valuation, prone to discretionary distortion, warrants rigorous signals to identify quality reports and disclosures (Mangala and Dhanda, 2022;Pandey and Pattanayak, 2022). Quality signals by unearthing the unknown issuer's traits mitigate the information asymmetry risk, abating adverse selection problems and facilitating more informed decisions (Carey et al, 2016;Gao and Hou, 2019;Zhou et al, 2020).…”

“…The pre-listing valuation manipulation attempts are in vain in elevating the IPO’s long-term performance (Brycz et al. , 2018; Mangala and Dhanda, 2022; Wang and Wang, 2021). The artificially inflated returns, allied to pre-IPO earnings management attempts, tend to normalize and adjust to a firm’s real potential in the long run (Borghesi and Pencek, 2013; Nikbakht et al.…”

The Effect of Tax Planning and Deferred Tax Charges on Earning Management

“…According to Teoh et al, (in Mangala & Dhanda, 2022), investors cannot see through financial misstatements presented by companies because of information asymmetry. Ritter (in Mangala & Dhanda, 2022) argues that investors do not have an alternative source for assessing a company's work other than through the media of financial reports that have been provided by the company in the prospectus. Thus, investors are often misled by inadequate information due to information asymmetry.…”