Earnings management and initial public offerings: a new perspective from Egypt

Purpose - The purpose of this paper is to empirically investigate the phenomenon of earnings management in the Egyptian initial public offerings (IPO) market where most of the IPOs were the privatisations of state‐owned enterprises (SOEs). Design/methodology/approach - Using a sample of 59 Egyptian IPOs, the extent of earnings management was computed using a modified cross‐sectional version of Jones’ model. Findings - The initial results do not provide support for the hypothesis that Egyptian IPO firms tend to overstate their earnings before the IPO date. However, when the sample firms were classified under two groups based on the pre‐IPO discretionary accruals, the results illustrate that most privately‐owned companies were found among those which contemplate to aggressively manage earnings upwards in order to maximise the IPO proceeds, whereas privatised public enterprises were found with no systematic pattern of earnings manipulation. The results also demonstrate that pre‐offering discretionary accruals do not explain the post‐offering underperformance in earnings but predict a portion of the subsequent poor share returns performance. Practical implications - The findings could be of assistance to all those involved in IPOs, such as the regulatory authorities and the primary and secondary market investors. Originality/value - With a few exceptions, most of the literature on earnings management has been based on the US data. Therefore, it is hoped that undertaking a research in a country such as Egypt, where the shareholding structures of most Egyptian IPO companies were concentrated in the hands of the state before going public, may reveal a different perception of earnings management and help determine whether this setting would lead to a higher or lower propensity for earnings management.