4.4 Article

Earnings quality at initial public offerings

Journal

JOURNAL OF ACCOUNTING & ECONOMICS
Volume 45, Issue 2-3, Pages 324-349

Publisher

ELSEVIER
DOI: 10.1016/j.jacceco.2007.12.001

Keywords

IPO; earnings management; accruals; conservatism; earnings quality

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We show that, contrary to popular belief, initial public offering (IPO) firms report more conservatively. We attribute this to the higher quality reporting demanded of public firms by financial statement users and consequentially higher monitoring by auditors, boards, analysts, rating agencies, press, and litigants, and to greater regulatory scrutiny [Ball, R., Shivakumar, L., 2005. Earnings quality in UK private firms: comparative loss recognition timeliness. Journal of Accounting and Economics 39, 83-128]. We also question the evidence of Teoh et al. [1998b. Earnings management and the subsequent market performance of initial public offerings. Journal of Finance 53, 1935-1974] supporting the alternative hypothesis that managers opportunistically inflate earnings to influence IPO pricing. We conjecture that upward-biased estimates of discretionary accruals occur in a broad genre of studies on earnings management around similar large transactions and events. (c) 2008 Elsevier B.V. All rights reserved.

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