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Pre-IPO earnings management: Evidence from India

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  • Nikbakht, Ehsan
  • Sarkar, Sayan
  • Smith, Garrett C.
  • Spieler, Andrew C.

Abstract

The Indian market is characterized by a relatively large number of unsophisticated retail investors, which provides a sharp contrast to many developed markets. Indian capital markets also provide a novel environment to test pre-Initial Public Offerings (IPO) earnings management and the capital market staging hypothesis. Our dataset encompasses a long time-period (1998–2016) including pre-IPO data and an important IPO regulatory change. Specifically, Indian markets instituted optional IPO grading (2006), required IPO grading (2007), and then reverted back to optional IPO grading (2014). We find evidence that Indian IPO firms which utilize reputable investment banks are less likely to manipulate pre-IPO earnings. Harder to value firms, such as those with large amounts of research and development, are more likely to engage in pre-IPO earnings management. We also find support for the capital market staging hypothesis in India. Additionally, there is lower pre-IPO earnings management during the optional IPO grading period. Our research also has important policy implications underscoring the need for increased transparency, particularly in emerging markets.

Suggested Citation

  • Nikbakht, Ehsan & Sarkar, Sayan & Smith, Garrett C. & Spieler, Andrew C., 2021. "Pre-IPO earnings management: Evidence from India," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 44(C).
    • Handle: RePEc:eee:jiaata:v:44:y:2021:i:c:s1061951821000252
    DOI: 10.1016/j.intaccaudtax.2021.100400
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    More about this item

    Keywords

    Earnings initial public offerings; Earnings management; Indian capital markets; Capital staging;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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