Initial Public Offerings, Accounting Choices, and Earnings Management*

Abstract

Abstract. This paper investigates whether entrepreneurs manipulate earnings in the periods prior to taking their flrms public through the choice of accounting conventions. The preponderance of evidence, using powerful accrual tests that were able to detect earnings management in other contexts, indicates little, if any, manipulation. To the extent that there is earnings management, the results suggest that this phenomenon is more pronounced among small firms and among firms with large finandal leverage and is to a lesser degree related to the quality of the underwriters and auditors employed when going public.Resume. Les auteurs ont voulu savoir si les entrepreneurs manipulaient les b£n€fices dans les exerdces pr£c^dant un appel public It l'^pargne par le truchement du choix des normes et conventions comptables. La preponderance des preuves recueillies h l'aide des puissantes techniques existantes de sondage des produits et des charges visant k d^celer les cas d'« accommodation » des b^n^fices dans d'autres contextes, revile une faible manipulation, sinon aucune. Dans la mesure oi) il y a accommodation des b^n^-fices, les resultats obtenus donnent It penser que le ph^nom^ne est davantage accentud chez les entreprises de petite taille ou dont le levier finander est ^lev^, et qu'il est reli6 de fa^on plus t^nue It la quality des preneurs fermes et des verificateurs k qui l'entrepdse a recours lorsqu'elle fait appel public h r^pargne.This study examines whether entreprenetirs systematically select accounting methods to increase reported income in the periods prior to going public. Asymmetry of information between the entrepreneur and outside investors concerning the value of initial public offerings (IPOs) is well recognized (e.g., Leland and Pyle

Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance

“…Finally, notwithstanding its indirect link with the board of listing, individual company size may have a separate, distinguishable impact on earnings management (Aharony et al, 1993). Larger companies tend to attract greater analyst and investor interest, with lower information asymmetry reducing the potential opportunities for earnings management.…”

“…Auditor reports on the reliability of the financial data included in the prospectus and the underwriter signal the quality of new issues. Aharony et al (1993) argue that high-quality auditors and underwriters have greater incentives to provide accurate information in IPOs to avoid litigation costs and reputational damage. Thus, earnings management is more likely discovered by higher quality auditors and underwriters.…”

“…While a small number of prior studies investigate cross-sectional variation seeking to assess the determinants of IPO earnings management propensity in different contexts (e.g., Aharony et al, 1993;Neill et al, 1995;Zhou & Elder, 2002;Chen et al, 2005;Nagata & Hachiya, 2006;Cormier & Martinez, 2006), these mainly use data from developed markets. The present study investigates the pervasiveness of earnings management across IPOs and the specific factors which affect decisions to manage earnings, within the context of a developing market, Malaysia.…”

Are Voluntary Internal Controls-Related Audit Report Disclosures Informative in IPOs?

“…Voluntary company-provided news disclosures outside regulatory filings are associated with less underpricing for companies with the highest first-day returns (Schrand and Verrecchia 2002). The limited information available from third party sources for IPO companies (Aharony, Lin, and Loeb 1993;Friedlan 1994), however, makes it difficult to judge the appropriateness of reported accounting numbers (Fan 1997). When other outlets do not provide credible information, the audit report becomes particularly useful (Church et al 2008).…”

The Optimal Timing of the Transfer of Hidden Reserves in the German and Austrian Tax Systems - A Market-Based Approach with Special Attention to the Term Structure of Interest Rates and Interest Rate Risk

“…Second, there is a link between commercial law and tax law in German-speaking countries 1 There are, for example, papers which investigate whether earnings management is performed in order to smooth earnings (Ronen/Sadan (1981)), in order to increase manager compensation (Healy (1985), Holthausen/Larcker/Sloan (1995), Balsam (1998), Soo (1999), Guidry/Leone/Rock (1999)), in order to reduce tax liabilities (Boynton/Dobbins/Plesko (1992), Hand (1993), Chen/Daley (1996), Chung (1998), Calegari (2000)), in order to fulfill regulatory requirements (Moyer (1990), Scholes/Wilson/Wolfson (1990), Collins/Shackelford/Wahlen (1995), Chen/Daley (1996), Kim/Kross (1998)), in order to avoid/delay technical defaults (Sweeney (1994)) or in order to fulfill management's performance forecasts or the market expectations of analysts (Robb (1998), Kasznik (1999)). In addition, the connections between earnings management and takeovers (Easterwood (1997)), CEO changes (Pourciau (1993)), antitrust investigations (Cahan (1992)), import relief investigations (Jones (1991)), labor union negotiations (Liberty/Zimmerman (1986)), management buyouts (De Angelo (1988), Perry/Williams (1994)) and equity offers (Aharony/Lin/Loeb (1993), Teoh/Wong/Rao (1998)) have been examined. which is not found in England or the USA, as taxable income is calculated on the basis of commercial earnings (with several corrections).…”