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Regulations, earnings management, and post-IPO performance: The Chinese evidence

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  • Kao, Jennifer L.
  • Wu, Donghui
  • Yang, Zhifeng
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    Abstract

    In this study, we examine whether government regulatory initiatives in China involving IPO by SOEs may have contributed to opportunistic behaviors by the issuer. We focus on two sets of IPO regulations issued between January 1, 1996 and February 11, 1999: pricing regulations, which stipulate that IPO prices be a function of accounting performance, and penalty regulations, which penalize IPO firms for overly optimistic forecasts. We find that IPO firms that report better pricing-period accounting performance have larger declines in post-IPO profitability, lower first-day stock returns and worse long-run post-IPO stock performance. Furthermore, IPO firms that make overoptimistic forecasts also have lower first-day returns and worse post-IPO stock performance. Using non-core earnings as the proxy for earnings management, we document some evidence that IPO firms that report higher pricing-period accounting performance have engaged in more income-increasing earnings management. Hence, pricing regulations may have induced IPO firms to inflate pricing-period earnings and affect the post-IPO performance negatively. On the other hand, penalty regulations have deterred IPO firms from making overoptimistic earnings forecast and therefore have a positive impact on the behavior of IPO firms.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 1 (January)
    Pages: 63-76

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:1:p:63-76

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    Web page: http://www.elsevier.com/locate/jbf

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    Keywords: Initial public offerings Earnings management Regulations;

    References

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    Cited by:
    1. Kuo, Jing-Ming & Ning, Lutao & Song, Xiaoqi, 2014. "The Real and Accrual-based Earnings Management Behaviors: Evidence from the Split Share Structure Reform in China," The International Journal of Accounting, Elsevier, vol. 49(1), pages 101-136.
    2. Chi, Jianxin (Daniel) & Gupta, Manu, 2009. "Overvaluation and earnings management," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(9), pages 1652-1663, September.
    3. Luo, Yongli & Fang, Fang & Esqueda, Omar A., 2012. "The overseas listing puzzle: Post-IPO performance of Chinese stocks and ADRs in the U.S. market," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 22(5), pages 193-211.
    4. Jiang, Guohua & Yue, Heng & Zhao, Longkai, 2009. "A re-examination of China's share issue privatization," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(12), pages 2322-2332, December.
    5. Chen, An-Sing & Cheng, Lee-Young & Cheng, Kuang-Fu & Chih, Shu-Wei, 2010. "Earnings management, market discounts and the performance of private equity placements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(8), pages 1922-1932, August.
    6. Xie, Xiaoying, 2010. "Are publicly held firms less efficient? Evidence from the US property-liability insurance industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(7), pages 1549-1563, July.
    7. Chang, Kiyoung & Kim, Yong-Cheol & Kim, Young Sang & Thornton, John H., 2012. "Unintended regulatory consequences: Evidence from the Korean IPOs," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 20(2), pages 292-309.
    8. Zhe Shen & Jerry Coakley & Norvald Instefjord, 2014. "Earnings management and IPO anomalies in China," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 42(1), pages 69-93, January.

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