Pre-IPO earnings management: Evidence from India
TL;DR: In this paper, the authors find evidence that Indian firms which utilize reputable investment banks are less likely to manipulate pre-IPO earnings and also support the capital market staging hypothesis in India.
About: This article is published in Journal of International Accounting, Auditing and Taxation.The article was published on 2021-09-01. It has received 12 citations till now. The article focuses on the topics: Initial public offering & Earnings.
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01 Jan 2008
TL;DR: In this article, the authors studied the relationship between underwriter reputation and underpricing in terms of Australian IPO data and found that more prestigious underwriters are associated with a higher level of underprice.
Abstract: Dimovski and Brooks (J Intern Financ Mark Inst Money 14:267–280, 2004b) examined 358 Australian industrial and mining company initial public offerings (IPOs) from 1994 to 1999 to report that more money was left on the table by IPOs that engaged underwriters than those that did not engage underwriters. Loughran and Ritter (Autumn 5–37, 2004) suggested that the negative relation between underwriter reputation and underpricing has reversed in the 1990s with U.S. IPOs. The main purpose of this paper is to study the relationship between underwriter reputation and underpricing in terms of Australian IPO data. In this paper, we use 380 Australian industrial company IPOs from 1994 to 2004 to perform the empirical study. Our results suggest that more prestigious underwriters are associated with a higher level of underpricing. Other variables that are found to be significant in explaining the level of IPO underpricing are market sentiment, share options, total capital raised and underwriter options.
62 citations
TL;DR: In this article , the authors examined whether the COVID-19 pandemic has affected earnings management and the value relevance of earnings in the USA and found that there was a significant decline in discretionary accruals from 2019 to 2020, suggesting that firms engaged in more income-decreasing earnings management to take a big bath in reporting earnings during the pandemic year.
Abstract:
Purpose
The purpose of this study is to examine whether the COVID-19 pandemic has affected earnings management and the value relevance of earnings in the USA.
Design/methodology/approach
Discretionary accruals, the explanatory power and slope coefficient of earnings are compared between 2019 (prepandemic year) and 2020 (pandemic year). Univariate and regression analyses are performed.
Findings
There was a significant decline in discretionary accruals from 2019 to 2020, suggesting that firms engaged in more income-decreasing earnings management to take a big bath in reporting earnings in the pandemic year. Meanwhile, the explanatory power and slope coefficient of earnings both were lower in 2020 than in 2019, consistent with the notion that the pandemic has impaired the value relevance of earnings.
Originality/value
This study explores the consequences of the pandemic from accounting perspective. It also enriches accounting research on economic crises.
10 citations
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TL;DR: In this paper, the authors investigated the relationship between changes in insider's ownership around IPO and post-IPO performance deterioration of Indian firms and found that the change in ownership is responsible for the deterioration in post IPO performance.
Abstract: The study investigates the relationship between changes in insider’s ownership around Initial Public Offering (IPO) and post-IPO performance deterioration of Indian firms. The univariate analysis shows that the performance of Indian public firms deteriorates significantly in post-IPO period. The relationship between ownership and performance is then analyzed through a, multivariate analysis of panel data. The results show that the change in ownership is responsiblem for the deterioration in post-IPO performance.
3 citations
TL;DR: In this paper , the persistence of earnings reported by companies in the initial public offering (IPO) process and the financial characteristics associated with persistence of the reported earnings are identified, and a simple single-factor regression model is employed to recognize the earnings persistence in new stock companies.
Abstract: Research background: A company?s earnings are one of the main determinants of investment decisions on the stock market. Thus, the reliability of disclosed financial information is crucial for the efficient allocation of capital. Unfortunately, reported earnings are an economic category susceptible to manipulation. This problem grows especially in the case of an initial public offering (IPO), as there is significant information asymmetry.
Purpose of the article: The main aim of the paper is to assess the persistence of earnings reported by companies in the IPO process and to empirically identify financial characteristics associated with persistence of earnings. The usefulness of financial information is directly related to the issue of earnings quality. Therefore, this paper contributes to the stream of study on the quality of financial reporting of new stock companies.
Methods: I employ a simple single-factor regression model to recognize the earnings persistence in new stock companies. Pre-IPO earnings are the explanatory variable. Then, I use multiple regression analysis to identify factors that influence this metric of reported earnings quality.
Findings & value added: Using a sample of companies from stock exchange markets in Central and Eastern Europe (i.e., the Warsaw Stock Exchange, the Bulgarian Stock Exchange, the Bucharest Stock Exchange, the Belgrade Stock Exchange, the Prague Stock Exchange) that went public between 2010 and 2018, I find that, generally, pre-IPO earnings hold higher persistence compared to earnings reported in the year of the IPO. Profitability seems to be a factor that significantly influences this feature. Thus, the results contribute to corporate theory and practice facing insufficient empirical evidence on the issue of sustaining pre-IPO profitability in the long term, additionally putting these concerns in the context of the economic environment of European emerging stock markets.
3 citations
TL;DR: In this article , the impact of related party transactions on the performance of Islamic banks in Pakistan has been investigated using data from all Islamic banks and specialized Islamic branches working in Pakistan from 2017 to 2021.
Abstract: Purpose The purpose of this study is to determine the impacts of related party transactions on the performance of Islamic banks in Pakistan. In addition, this study aims to determine whether corporate governance mechanisms enhance company performance and mitigate agency problems associated with related party transactions in the Islamic banks. Design/methodology/approach Sample includes all Islamic banks domiciled in Pakistan from 2017 to 2021. To run the regression models, the regression assumptions about normality, heteroskedasticity, autocorrelation and multicollinearity are determined. Findings This study finds that institutional ownership has a significant impact on mitigating agency problems associated with tunneling. Related party borrowings indicate expropriation and conflict of interest, whereas related party revenues indicate propping and efficient transactions. Research limitations/implications This study uses data from all Islamic banks and specialized Islamic branches working in Pakistan. In the future, data of other institutions offering Islamic finance in Pakistan and in other emerging economies can be used to determine the role of related party transactions. Practical implications A thorough understanding of related party interrelationships in the Islamic banking system is essential, as these transactions can result in either the creation of wealth or the destruction of wealth. It is also necessary to determine the type of transactions that ultimately benefit Islamic investors. Originality/value The impacts of different related party transactions (in terms of cash inflows and outflows) of Islamic banks are investigated. Prior studies generally look at the impact of related party transactions on firm performance in totality.
2 citations
References
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TL;DR: In this article, the authors examine the specification and power of tests based on performance-matched discretionary accruals, and make comparisons with tests using traditional discretionary accumrual measures (e.g., Jones and modified-Jones models).
4,247 citations
Posted Content•
TL;DR: The Worldwide Governance Indicators (WGI) project as mentioned in this paper is a collection of six dimensions of governance starting in 1996: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption.
Abstract: This paper summarizes the methodology of the Worldwide Governance Indicators (WGI) project, and related analytical issues. The WGI cover over 200 countries and territories, measuring six dimensions of governance starting in 1996: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. The aggregate indicators are based on several hundred individual underlying variables, taken from a wide variety of existing data sources. The data reflect the views on governance of survey respondents and public, private, and NGO sector experts worldwide. The WGI also explicitly report margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. Even after taking these margins of error into account, the WGI permit meaningful cross-country and over-time comparisons.
3,879 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
TL;DR: In this paper, the authors show that companies issuing stock during 1970 to 1990, whether an initial public offering (IPO) or a seasoned equity offering (SEO), significantly underperform relative to nonissuing firms for five years after the offering date.
Abstract: Companies issuing stock during 1970 to 1990, whether an initial public offer ng or a seasoned equity offering, have been poor long-run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book-to-market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date. IN THIS ARTICLE, WE show that companies issuing stock during 1970 to 1990, whether an initial public offering (IPO) or a seasoned equity offering (SEO), significantly underperform relative to nonissuing firms for five years after the offering date. The average annual return during the five years after issuing is only 5 percent for firms conducting IPOs, and only 7 percent for firms conducting SEOs. While evidence that firms going public subsequently underperform has been documented previously, our evidence that the same pattern holds for firms conducting SEOs is new. The magnitude of this underperformance is economically important: based upon the realized returns, an investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date. Surprisingly, this number is the same for both IPOs and SEOs. While the difference in returns between issuers and nonissuers on which the 44 percent number is based only holds
3,559 citations
TL;DR: In this article, the authors examined the returns earned by subscribing to initial public offerings of equity (IPOs), and they showed that IPOs with more informed investor capital require higher returns, and that prestigious underwriters are associated with IPOs that have lower returns.
Abstract: This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.
2,682 citations