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Opportunistic earnings management during initial public offerings: evidence from India

Author

Listed:
  • Rachappa Shette
  • Sudershan Kuntluru
  • Sunder Ram Korivi

Abstract

Purpose - This paper aims to examine the impact of initial public offerings (IPO)-year opportunistic earnings management on long-term market and earnings performance. Design/methodology/approach - A sample of 150 book-built IPOs over 2001-2006 are analysed based on industry adjusted return on sales and industry adjusted return on assets for six post-IPO years. The quality of earnings is measured in two ways using discretionary accruals and Beneish manipulation score. Modified Jones model is used to estimate the expected accruals and to compute the discretionary accruals for each IPO firm year. Regression model is used to examine the impact of IPO-year quality of earnings on future earnings performance. Findings - The paper finds that earnings and market performance of IPO companies are abnormally higher in the IPO-year, as compared to the post-IPO years. Similarly, the quality of earnings during the IPO-year is lower than those in the post-IPO years. The results also show that the opportunistic earnings management in IPO-year has significant negative impact on the long-term adjusted earnings and market performance. Research limitations/implications - The present study is confined to the period from 2001 to 2006 for the purpose of post-IPO analysis for a period of six post-IPO years. Thus, the conclusions of this study are to be viewed with this limitation. Originality/value - This paper is the first study based on the Indian context to examine the relationship between the quality of earnings of the IPO firm and long-term earnings and market performance.

Suggested Citation

  • Rachappa Shette & Sudershan Kuntluru & Sunder Ram Korivi, 2016. "Opportunistic earnings management during initial public offerings: evidence from India," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 15(3), pages 352-371, August.
    • Handle: RePEc:eme:rafpps:v:15:y:2016:i:3:p:352-371
    DOI: 10.1108/RAF-03-2015-0048
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    Citations

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    Cited by:

    1. Sarthak Kumar Jena & Chandra Sekhar Mishra & Prabina Rajib, 2020. "Do Indian Companies Manage Earnings Before Share Repurchase?," Global Business Review, International Management Institute, vol. 21(6), pages 1427-1447, December.
    2. Umme Kulsoom Zaidi & Javaid Akhter & Asif Akhtar, 2018. "Window Dressing of Financial Statements in the Era of Digital Finance: A Study of Small Cap Indian Companies," Metamorphosis: A Journal of Management Research, , vol. 17(2), pages 67-75, December.
    3. Deepa Mangala & Mamta Dhanda, 2019. "Earnings Management and Performance of IPO Firms: Evidence from India," Indian Journal of Corporate Governance, , vol. 12(1), pages 39-58, June.
    4. Lo, Huai-Chun & Wu, Ruei-Shian & Kweh, Qian Long, 2017. "Do institutional investors reinforce or reduce agency problems? Earnings management and the post-IPO performance," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 62-76.
    5. 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).
    6. Manish Bansal & Asgar Ali, 2021. "Differential impact of earnings management on the accrual anomaly," Journal of Asset Management, Palgrave Macmillan, vol. 22(7), pages 559-572, December.

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