Initial Public Offerings, Accounting Choices, and Earnings Management*

Abstract. This paper investigates whether entrepreneurs manipulate earnings in the periods prior to taking their firms public through the choice of accounting conventions. The preponderance of evidence, using powerful accrual tests that were able to detect earnings management in other contexts, indicates little, if any, manipulation. To the extent that there is earnings management, the results suggest that this phenomenon is more pronounced among small firms and among firms with large financial leverage and is to a lesser degree related to the quality of the underwriters and auditors employed when going public. RA©sumA©. Les auteurs ont voulu savoir si les entrepreneurs manipulaient les bA©nA©fices dans les exercices prA©cA©dant un appel public A l'A©pargne par le truchement du choix des normes et conventions comptables. La prA©pondA©rance des preuves recueillies A l'aide des puissantes techniques existantes de sondage des produits et des charges visant A dA©celer les cas d'â‰a accommodation » des bA©nA©fices dans d'autres contextes, rA©vA¨le une faible manipulation, sinon aucune. Dans la mesure oA¹ il y a accommodation des bA©nA©fices, les rA©sultats obtenus donnent A penser que le phA©nomA¨ne est davantage accentuA© chez les entreprises de petite taille ou dont le levier financier est A©levA©, et qu'il est reliA© de faA§on plus tA©nue A la qualitA© des preneurs fermes et des vA©rificateurs A qui l'entreprise a recours lorsqu'elle fait appel public A l'A©pargne.

[1]  S. M. Tiniç,et al.  Anatomy of Initial Public Offerings of Common Stock , 1988 .

[2]  L. DeAngelo,et al.  Auditor size and audit quality , 1981 .

[3]  Sheridan Titman,et al.  Information quality and the valuation of new issues , 1986 .

[4]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[5]  J. Royston.  An Extension of Shapiro and Wilk's W Test for Normality to Large Samples , 1982 .

[6]  W. D. Hall,et al.  Lessons Auditors Ignore at Their Own Risk , 1991 .

[7]  Robert Heinkel,et al.  Signaling and the Valuation of Unseasoned New Issues , 1982 .

[8]  P. J. Hughes.  Signalling by direct disclosure under asymmetric information , 1986 .

[9]  Srikant M. Datar,et al.  The role of audits and audit quality in valuing new issues , 1991 .

[10]  Jay R. Ritter,et al.  The costs of going public , 1987 .

[11]  Ronald A. Dye,et al.  EARNINGS MANAGEMENT IN AN OVERLAPPING GENERATIONS MODEL , 1988 .

[12]  M. McNichols,et al.  Evidence of Earnings Management from the Provision for Bad Debts , 1988 .

[13]  David P. Baron,et al.  A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues , 1982 .

[14]  F. Reilly,et al.  An Examination of Mispricing, Returns, and Uncertainty for Initial Public Offerings , 1987 .

[15]  Hayne E. Leland,et al.  INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION , 1977 .

[16]  L. DeAngelo,et al.  Managerial competition, information costs, and corporate governance: The use of accounting performance measures in proxy contests☆ , 1988 .