Real and Accrual Earnings Management and IPO Failure Risk
March 19, 2013 Leave a comment
Real and Accrual Earnings Management and IPO Failure Risk
Mohammad Alhadab University of Leeds – Leeds University Business School (LUBS)
Iain Clacher University of Leeds – Leeds University Business School (LUBS)
Kevin Keasey University of Leeds – Division of Accounting and Finance
February 26, 2013
Abstract:
This paper analyzes the relationship between real and accrual earnings management activities and IPO failure risk. Recent research shows that IPO firms manage earnings upward around the offer year utilizing real and accrual earnings management activities (e.g., Wongsunwai, 2012) and that these activities have severe negative consequences for future stock returns and operating performance (e.g., Cohen and Zarowin, 2010; Kothari et al., 2012). Thus, we predict IPO firms that engaged in higher levels of real and accrual earnings management will exhibit a higher probability of failure and lower survival rates. We test this hypothesis based on a sample of 570 IPO firms that went public over the period 1998-2008. We find evidence that IPO firms manipulate earnings upward utilizing real and accrual earnings management around the IPO. We also find that IPO firms with higher levels of real and accrual earnings management during the IPO year have a higher probability of IPO failure and lower survival rates in subsequent periods.
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