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Journal ArticleDOI

Impact of IPO grading on earnings management

10 Sep 2015-Journal of Financial Reporting and Accounting (Emerald Group Publishing Limited)-Vol. 13, Iss: 2, pp 142-158

AbstractPurpose – This paper aims to examine the impact of initial public offering (IPO) grading on earnings management by Indian companies in their IPOs. Specifically, it investigates whether earnings management significantly differs in the pre-IPO grading regime and post-IPO grading regime. Further, it examines whether earnings management significantly differs between high-graded and low-graded IPOs. Design/methodology/approach – The cross-sectional modified Jones model is used to obtain the discretionary accruals, a proxy for earnings management. The impact of IPO grading on earnings management is assessed using multiple regression analysis. Findings – Earnings management is significantly lower in graded IPOs as compared to the ones that are not graded. Further, among the graded IPOs, the high-graded IPOs exhibit lower earnings management as compared to the low-graded IPOs. The findings are robust to the use of an alternative measure for discretionary accruals. Originality/value – IPO grading in India is a uni...

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Citations
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DOI
01 Jul 2020
Abstract: According to a method of earnings management activities that administrators can manage reported earnings from the definition of real activity. In particular they can be located across time and activities in a way that accounting period to achieve a certain revenue target. Conservative attitudes of auditors in presenting their views about the independence of the auditor can considered as a remarkable point in the audit function. The Purpose of this study was to investigate the effect of audit quality on earnings management real time IPO companies. For this purpose, the data of 128 companies listed on the Tehran Stock Exchange during the years 2007 to 2017 were evaluated. The results indicated that the audit quality increases in the year of initial public offerings. The results also demonstrated that there is a significant and positive relationship between the audit fees in the year of initial public offerings and the audit fees in the year after the initial public offerings. Also findings of the research show that earnings management through accrual items has a positive and significant relationship with initial stock offerings.

5 citations


Cites background from "Impact of IPO grading on earnings m..."

  • ...Maheshwari and Agrawal [20] investigated whether earnings management significantly differs in the preIPO grading regime and post-IPO grading regime....

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  • ...Their findings were robust to the use of an alternative measure for discretionary accruals [20]....

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Dissertation
01 Jan 2019

4 citations


Cites background from "Impact of IPO grading on earnings m..."

  • ...According to Sundarasen, Khan, and Rajangam (2018); Mantell (2016) and Brau and Fawcett (2006), prestige and experience of underwriters affect the level of underpricing of IPOs in main market....

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  • ...Maheshwari & Agrawal (2015) examined the Indian IPOs between the period of 2002 and 2012 to investigate the impact of graded and non-graded IPOs on the management of earnings....

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  • ...…49 India Underpricing 32 Deng & Zhou (2015) 2009-2012 355 China Underpricing 33 Tan, Dimovski, & Fang (2015) 1996-2012 135 China Underpricing 34 Maheshwari & Agrawal (2015) 2002-2012 All India Underpricing 35 Luo, Qian, & Ren (2015) 2001-2012 120 cities China Underpricing 36 Reutzel & Belsito…...

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Journal ArticleDOI
18 Sep 2020
Abstract: The research aims to find the impact of ownership retention, managerial ownership, and boards on value IPO premium and underpricing. We investigate by using hand collect data 202 IPO prospectuses during 2008-2017 and using Warp PLS 5.0 to compute the data. Our finding suggests that may use to guide the investor in making informed decisions to see the level of the proportion of sharehold by old ownership and management. When the high level of ownership retention and managerial ownership, make the value IPO premium and underpricing will be high. On the other hand duality of the managerial role in firms making the value will be achieved. This paper contributes to the value of IPO premium and underpricing literature when influence by ownership share on initial public offerings context of emerging markets. Keywords: Ownership retention; Managerial Ownership; Boards; IPO premium; underpricing

2 citations


Cites background from "Impact of IPO grading on earnings m..."

  • ...According to Maheshwari and Agrawal (2015) underpricing is a universal phenomenon that occurs in IPO whereas Overprice is a big concern when reducing investor prosperity....

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Journal ArticleDOI
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.

2 citations

Journal ArticleDOI
28 Jun 2019
Abstract: Disclosure through corporate annual reports is intended to enhance transparency and reduce information asymmetry during public issues. Ritter (1991) revealed that there is something fishy i...

1 citations


References
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Journal ArticleDOI
Abstract: This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non-Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross-sectional version of the Jones 1991 model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non-Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10,379 Big Six and 2,179 non-Big Six firm years. Specifically, clients of non-Big Six auditors report discretionary accruals that are, on average, 1.5-2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non-Big Six auditors. This result also indicates that lower audit quality is associated with more “accounting flexibility”.

2,905 citations


"Impact of IPO grading on earnings m..." refers background in this paper

  • ...Becker et al. (1998) examine the relation between audit quality and earnings management....

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Journal ArticleDOI
Abstract: Financial reporting around the time of IPOs is consistent with listed firms reporting more conservatively than previously as private firms, consistent with the results in Ball and Shivakumar (2005). We hypothesize that IPO firms supply the higher quality financial reports demanded by public investors, who face higher information asymmetry than private investors. The market mechanisms for enforcing this demand include monitoring by internal and external auditors, boards, analysts, rating agencies, the press and other parties. Once public, firms are subject to greater regulatory scrutiny and penalties. From the point of releasing the public prospectus document onwards, IPO firms face a greater threat of shareholder litigation and regulatory action if they do not meet higher reporting standards. The evidence is overwhelmingly in favor of this hypothesis. We show that the evidence reported by Teoh, Welch and Wong (1998) in support of the alternative hypothesis, that IPO firms opportunistically inflate earnings to influence the IPO price, is unreliable for a variety of reasons. We provide cleaner evidence, from samples of U.K. and U.S. IPOs, that IPO prospectus financials are conservative by several standards. We conjecture that the types of bias we observe in conventional estimates of "discretionary" accruals occur in a broad genre of studies on earnings management around large transactions and events.

493 citations

Journal ArticleDOI
Abstract: Abnormal accounting accruals are unusually high around stock offers, especially high for firms whose offers subsequently attract lawsuits. Accruals tend to reverse after stock offers and are negatively related to post-offer stock returns. Reversals are more pronounced and stock returns are lower for sued firms than for those that are not sued. The incidence of lawsuits involving stock offers and settlement amounts are significantly positively related to abnormal accruals around the offer and significantly negatively related to post-offer stock returns. Our results support the view that some firms opportunistically manipulate earnings upward before stock issues rendering themselves vulnerable to litigation.

475 citations

Journal ArticleDOI
Abstract: We show that, contrary to popular belief, initial public offering (IPO) firms report more conservatively. We attribute this to the higher quality reporting demanded of public firms by financial statement users and consequentially higher monitoring by auditors, boards, analysts, rating agencies, press, and litigants, and to greater regulatory scrutiny [Ball, R., Shivakumar, L., 2005. Earnings quality in UK private firms: comparative loss recognition timeliness. Journal of Accounting and Economics 39, 83–128]. We also question the evidence of Teoh et al. [1998b. Earnings management and the subsequent market performance of initial public offerings. Journal of Finance 53, 1935–1974] supporting the alternative hypothesis that managers opportunistically inflate earnings to influence IPO pricing. We conjecture that upward-biased estimates of “discretionary” accruals occur in a broad genre of studies on earnings management around similar large transactions and events.

404 citations

Journal ArticleDOI
John M. Friedlan1
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.

340 citations