Do IPO Firms Manage Earnings?

Abstract

IPO literature documents that IPO firms experience a decline in returns after listing. This paper investigates that phenomena and tries to find reasons for it. Earning management studies report that if companies have a high level of discretionary accruals, then those companies engage in earnings management. This paper connects these two literature branches together by using a third part of literature, which is market timing and market efficiency. I built a dummy variable DTIMERS that takes the value of one if the companies time the market and zero if they do not. I ran multiple regression models where Absolute Discretionary Accrual is the dependent variable, with DTIMERS as an independent variable along with other control variables. The evidence shows the IPO companies that time the market engage in earnings management, and that may explain why those companies in the post-listing period achieve significant negative abnormal returns while other IPOs who do not manage earnings achieve significant positive abnormal return in the post-listing period.