Real and Accrual Earnings Management and IPO Failure Risk

The association between earnings forecast in IPOs prospectuses and earnings management: An empirical analysis

“…The highest earnings management measure is discretionary accrual earnings management, whilst the lowest is abnormal discretionary expenses. This is comparable with the findings of Alhadab et al (2015). In our sample of IPO firms, 27.4% retaining 56.3%.…”

“…Financial and utilities firms were excluded due to differences in their reporting and disclosure requirements (see Teoh et al 1998 We estimated accrual earnings management using a cash flow, following the approach of, Hribar and Collins (2002) and Alhadab et al (2015). The cash flow approach has 11 minimal measurement errors, compared to the balance sheet approach.…”

“…For firms considering listing, this impact is exacerbated by asymmetric information between owner-managers and potential outside investors (Toeh et al 1998a;DuCharme, Malatesta and Sefcik 2001). Recent evidence in the earnings management literature has focused on the complex relationships between earnings management and governance (Jaggi, Leung and Gul 2009), debt/diversification (Rodriguez and Hemmen 2010), compensation (Ibrahim and Lloyd 2011) and failure rates (Alhadab, Clacher and Keasey 2015).…”

Re-Examining Real Earnings Management to Avoid Losses

“…In Wongsunwai (2013), IPO firms backed by higher-quality VCs usually have higher performance; thus, they have lower REM on average. Similarly, because in general, firms with higher levels of REM have smaller profits, they are less likely to survive in subsequent periods compared to the more profitable ones, which could explain the results in Alhadab (2013). In sum, many subsequent studies do not sufficiently control for the underlying performance, which could potentially drive the results.…”

“…Apart from future performance, several studies examine other effects of real activities manipulation. Alhadab (2013) analyzes the relationship between real earnings management and IPO failure risk, and finds that IPO firms with higher levels of real earnings management during the IPO year have a higher probability of IPO failure and lower survival rates in subsequent periods. Kim and Park (2014) examine the effect of clients' real activities manipulation on auditors' client retention decisions.…”