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Are Accruals during Initial Public Offerings Opportunistic?

Author

Listed:
  • Siew Hong Teoh

    (University of Michigan Business School)

  • T. J. Wong

    (Hong Kong University of Science and Technology)

  • Gita R. Rao

    (Colonial Management Associates)

Abstract

We find evidence that initial public offering (IPO) firms, on average, have high positive issue-year earnings and abnormal accruals, followed by poor long-run earnings and negative abnormal accruals. The IPO-year abnormal, and not expected, accruals explain the cross-sectional variation in post-issue earnings and stock returns. The results are robust with respect to alternative abnormal accruals and earnings performance measures. IPO firms adopt more income-increasing depreciation policies when they deviate from similar prior performance same industry non-issuers, and they provide significantly less for uncollectible accounts receivable than their matched non-issuers. The results taken together suggest opportunistic earnings management partially explains the new issues anomaly.

Suggested Citation

  • Siew Hong Teoh & T. J. Wong & Gita R. Rao, 1998. "Are Accruals during Initial Public Offerings Opportunistic?," Review of Accounting Studies, Springer, vol. 3(1), pages 175-208, March.
    • Handle: RePEc:spr:reaccs:v:3:y:1998:i:1:d:10.1023_a:1009688619882
    DOI: 10.1023/A:1009688619882
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    References listed on IDEAS

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    Cited by:

    1. Mark Cecchini & Scott B. Jackson & Xiaotao Liu, 2012. "Do initial public offering firms manage accruals? Evidence from individual accounts," Review of Accounting Studies, Springer, vol. 17(1), pages 22-40, March.
    2. Dimitrios C. Ghicas & Afroditi Papadaki & Georgia Siougle & Theodore Sougiannis, 2008. "The relevance of quantifiable audit qualifications in the valuation of IPOs," Review of Accounting Studies, Springer, vol. 13(4), pages 512-550, December.
    3. Chris Armstrong & Antonio Davila & George Foster, 2006. "Venture-backed Private Equity Valuation and Financial Statement Information," Review of Accounting Studies, Springer, vol. 11(1), pages 119-154, March.

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