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Abnormal Accruals in Newly Public Companies: Opportunistic Misreporting or Economic Activity?

Author

Listed:
  • Christopher Armstrong

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • George Foster

    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Daniel Taylor

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

Newly public companies tend to exhibit abnormally high accruals in the year of their initial public offering (IPO). Although the prevailing view in the literature is that these accruals are caused by opportunistic misreporting, we show that these accruals do not appear to benefit managers and instead result from the normal economic activity of newly public companies. In particular, and in contrast to the notion that managers benefit from inflating accruals through an inflated issue price, inflated post-IPO equity values, and increased insider trading profits, we find no evidence of a relation between abnormal accruals and these outcomes. Instead, consistent with these accruals resulting from normal economic activity, we find that these accruals are attributable to the investment of IPO proceeds in working capital and that controlling for the amount of IPO proceeds invested in working capital produces a more powerful accrual-based measure of misreporting. This paper was accepted by Gérard Cachon, accounting .

Suggested Citation

  • Christopher Armstrong & George Foster & Daniel Taylor, 2016. "Abnormal Accruals in Newly Public Companies: Opportunistic Misreporting or Economic Activity?," Management Science, INFORMS, vol. 62(5), pages 1316-1338, May.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:5:p:1316-1338
    DOI: 10.1287/mnsc.2015.2179
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    References listed on IDEAS

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