Accounting Choices of Issuers of Initial Public Offerings
TL;DR: In this article, the authors report evidence that IPO issuers make income-increasing discretionary accruals in the financial statements released before the offering, consistent with the hypothesis that issuers believe that financial statement information affects IPO offering prices.
Abstract: . Because there are no market-determined prices for IPO shares before they are sold to investors, issuers and underwriters must use nonprice information about the firm to set the offering price. Accounting-based measures are frequently identified as particularly useful in valuing untraded securities. This paper reports evidence that IPO issuers make income-increasing discretionary accruals in the financial statements released before the offering. This evidence is consistent with the hypothesis that issuers believe that financial statement information affects IPO offering prices.
Resume. Les actions emises dans le cadre d'un premier appel, public a l'epargne n'ayant pas de prix fixe par le marche avant d'etre vendues aux investisseurs, les emetteurs et les preneurs ferme doivent utiliser l'information relative a l'entreprise n'ayant pas trait au prix pour etablir le prix d'emission. Les mesures d'origine comptable sont souvent considerees comme etant particulierement utiles dans revaluation de valeurs mobilieres non encore negociees. L'auteur demontre que dans les etats financiers qu'elles publient avant l'emission, les entreprises qui procedent a un premier appel public a l'epargne traitent les charges abonnees sur lesquelles elles exercent un pouvoir discretionnaire de facon a hausser les benefices. Cette constatation est conforme a l'hypothese selon laquelle les emetteurs estiment que l'information contenue dans les etats financiers a une incidence sur le cours des actions emises dans le cadre d'un premier appel public a l'epargne.
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TL;DR: In this article, the authors investigate the extent to which the earnings manipulations can be explained by earnings management hypotheses and the relation between earnings manipulation and weaknesses in firms' internal governance structures, and the capital market consequences experienced by firms when the alleged earnings manipulation are made public.
Abstract: . This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder, (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public.
Resume. Les auteurs analysent les entreprises assujetties aux mesures d'execution prises par la Securities and Exchange Commission dans les cas de presomption de transgression des principes comptables generalement reconnus. Ils s'interessent aux aspects suivants de la question: i) la mesure dans laquelle les presomptions de manipulations des benefices peuvent etre expliquees par les hypotheses existantes de gestion des benefices; ii) la relation entre les manipulations de benefices et les faiblesses des structures de regie interne des entreprises; et iii) la reaction du marche financier a l'endroit des entreprises au sujet desquelles les presomptions de manipulation des benefices sont rendues publiques. Les auteurs constatent qu'un incitatif majeur a la manipulation des benefices est le desir d'obtenir du financement externe a moindre cout. Ils demontrent que cet incitatif demeure important meme apres le controle des motifs contractuels que mettent de l'avant les travaux theoriques. Ils constatent egalement que les entreprises qui manipulent les benefices sont: i) davantage susceptibles d'avoir des conseils d'administration domines par la direction; ii) davantage susceptibles d'avoir un chef de la direction qui joue simultanement le role de president du conseil; iii) davantage susceptibles d'avoir un chef de la direction qui est egalement le fondateur de l'entreprise; iv) moins susceptibles d'avoir un comite de verification; et v) moins susceptibles d'avoir un bloc de titres detenus par un actionnaire exterieur. Enfin, les auteurs etablissent le fait que le cout du capital, pour les entreprises qui manipulent les benefices, enregistre des hausses appreciables lorsque ces manipulations sont rendues publiques.
4,081 citations
TL;DR: This paper pointed out that the "quality" of earnings is a function of the firm's fundamental performance and suggested that the contribution of a firms fundamental performance to its earnings quality is suggested as one area for future work.
Abstract: Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.
2,633 citations
Additional excerpts
...This conclusion is based on four studies in our database of accruals around a firm’s initial public offering (Aharony et al., 1993; Friedlan, 1994; Teoh et al., 1998a; Morsfield and Tan, 2006), and six studies around other types of issues (DeAngelo, 1986; Perry and Williams, 1994; Teoh et al....
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TL;DR: In this paper, the authors point out that the quality of earnings is a function of the firm's fundamental performance and suggest that the contribution of a firms fundamental performance to its earnings quality is suggested as one area for future work.
2,140 citations
TL;DR: This paper reviewed empirical research on the relation between capital markets and financial statements and found that the principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.
1,873 citations
TL;DR: This paper reviewed empirical research on the relation between capital markets and financial statements and found that the principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.
Abstract: I review empirical research on the relation between capital markets and financial statements. The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process. The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting. Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial disclosure decisions.
916 citations
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TL;DR: In this article, the authors test whether firms that would benefit from import relief attempt to decrease earnings through earnings management during import relief investigations by the United States International Trade Commission (ITC).
Abstract: This study tests whether firms that would benefit from import relief (eg, tariff increases and quota reductions) attempt to decrease earnings through earnings management during import relief investigations by the United States International Trade Commission (ITC) The import relief determination made by the ITC is based on several factors that are specified in the federal trade acts, including the profitability of the industry Explicit use of accounting numbers in import relief regulation provides incentives for managers to manage earnings in order to increase the likelihood of obtaining import relief and/or increase the amount of relief granted While studies of earnings management typically examine situations in which all contracting parties have incentives to "perfectly" monitor (adjust) accounting numbers for such manipulation, import relief investigations provide a specific motive for earnings management that is not
7,362 citations
TL;DR: In this paper, the authors argue that audit quality is not independent of audit firm size, even when auditors initially possess identical technological capabilities, and when incumbent auditors earn client-specific quasi-rents, auditors with a greater number of clients have more to lose by failing to report a discovered breach in a particular client's records.
4,969 citations
TL;DR: In this article, the authors used a sample of 1,526 IPOs that went public in the U.S. in the 1975-84 period, and found that in the 3 years after going public these firms significantly underperformed a set of comparable firms matched by size and industry.
Abstract: The underpricing of initial public offerings (IPOs) that has been widely documented appears to be a short-run phenomenon. Issuing firms during 1975-84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three-year anniversaries. There is substantial variation in the underperformance year-to-year and across industries, with companies that went public in high-volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these "windows of opportunity." NUMEROUS STUDIES HAVE DOCUMENTED two anomalies in the pricing of initial public offerings (IPOs) of common stock: (1) the (short-run) underpricing phenomenon, and (2) the "hot issue" market phenomenon. Measured from the offering price to the market price at the end of the first day of trading, IPOs produce an average initial return that has been estimated at 16.4%.1 Furthermore, the extent of this underpricing is highly cyclical, with some periods, lasting many months at a time, in which the average initial return is much higher.2 In this paper, I document a third anomaly: in the long-run, initial public offerings appear to be overpriced. Using a sample of 1,526 IPOs that went public in the U.S. in the 1975-84 period, I find that in the 3 years after going public these firms significantly underperformed a set of comparable firms matched by size and industry.
3,765 citations
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25 Aug 2011TL;DR: The authors analyzed the format of typical bonus contracts, providing a more complete characterization of their accounting incentive effects than earlier studies, and found that accrual policies of managers are related to income-reporting incentives of their bonus contracts.
Abstract: Studies examining managerial accounting decisions postulate that executives rewarded by earnings-based bonuses select accounting procedures that increase their compensation. The empirical results of these studies are conflicting. This paper analyzes the format of typical bonus contracts, providing a more complete characterization of their accounting incentive effects than earlier studies. The test results suggest that (1) accrual policies of managers are related to income-reporting incentives of their bonus contracts, and (2) changes in accounting procedures by managers are associated with adoption or modification of their bonus plan.
3,616 citations
TL;DR: In this paper, the authors present a model for the underpricing of initial public offerings based on the existence of a group of investors whose information is superior to that of the firm as well as that of all other investors.
2,912 citations