Impact of IPO grading on earnings management

Abstract

Purpose – This paper aims to examine the impact of initial public offering (IPO) grading on earnings management by Indian companies in their IPOs. Specifically, it investigates whether earnings management significantly differs in the pre-IPO grading regime and post-IPO grading regime. Further, it examines whether earnings management significantly differs between high-graded and low-graded IPOs. Design/methodology/approach – The cross-sectional modified Jones model is used to obtain the discretionary accruals, a proxy for earnings management. The impact of IPO grading on earnings management is assessed using multiple regression analysis. Findings – Earnings management is significantly lower in graded IPOs as compared to the ones that are not graded. Further, among the graded IPOs, the high-graded IPOs exhibit lower earnings management as compared to the low-graded IPOs. The findings are robust to the use of an alternative measure for discretionary accruals. Originality/value – IPO grading in India is a unique certification mechanism, introduced for the first time in any market. This paper establishes the efficacy of this mandatory certification mechanism in reducing earnings management. The findings could be valuable to issuer companies, investors and market regulators.

Earnings Management and Performance of IPO Firms: Evidence from India

“…The mean of performance in the earnings performance year (Y-1 to Y-3) and mean of performance in earnings performance year (Y-4 to Y-6) are used for each earnings performance variable in each IPO year. Prior studies (Ajit, Malik, & Verma, 2013; Das & Jena, 2016; Maheshwari & Aggarwal, 2015; Sarkar, Sarkar, & Sen, 2008) have discussed the influence of additional factors on performance of the company for whose detection control variables are used. These variables are as follows: …”

“…Ajit et al (2013), Mangala and Isha (2017) and Sarkar et al (2008) have discussed how the size of the company is related to earnings management. Natural logarithm of total asset is used to calculate the firm size on the basis of Das and Jena (2016) and Maheshwari and Aggarwal (2015).…”

“…There exists a positive relation between offer size and discretionary accruals. Following Maheshwari and Aggarwal (2015), natural logarithm of issue amount is taken as offer size.…”

“…Rao and Dandale (2008) disclose that the firms coming out with right issues use discretionary current accruals prior to the public issue to window dress profits and resulted in underperformance afterwards. Maheshwari and Aggarwal (2015) gave strong evidence of earnings management in Indian IPO and discern a negative relation between IPO grading with earnings management. In 2016, Shette, Kuntluru, and Korivi marked the presence of earnings management in Indian IPOs for the period commencing from 2001 to 2006 and showed the negative impact of earnings management on firm’s earnings and stock performance.…”

Analisis Pengaruh Komposisi Kepemilikan Terhadap Manajemen Laba Pada Perusahaan Yang Terdaftar Di Bursa Efek Indonesia

“…Pengaruh pertumbuhan penjualan juga menunjukkan hasil signifikan positif yang ditunjukkan melalui penelitian yang dilakukan oleh Chi (2015) yang pendapat tersebut didukung oleh Maheshwari & Agrawal (2015), Razzaque (2016), dan Ranjbar & Amanollahi (2018) serta Edison (2020) dengan hasil penelitian yang menyatakan bahwa perusahaan dengan pertumbuhan tinggi mungkin akan kekurangan kas dan oleh karena itu, akrual di perusahaan tersebut cenderung akan lebih tinggi. H7= Pertumbuhan penjualan berpengaruh signifikan positif terhadap praktik manajeman laba…”