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Earnings Management and the Long-Term Market Performance of Initial Public Offerings
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SIEW HONG TEOH
University of California - Paul Merage School of Business
T.J. WONG
Chinese University of Hong Kong - School of Accountancy
GITA RAO
Colonial Management Associates
May 1994
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Abstract:
We examine empirically whether earnings management as measured by discretionary accounting accruals explain post-issue stock return underperformance for IPO firms. We find that high discretionary accounting accruals are related to negative abnormal stock returns with high statistical significance. For example, a trading strategy of a short position in IPO firms with high discretionary accruals and a long position in IPOs with low discretionary accruals result in a mean (median) excess return of 102% (83.5%) in the 36-month period beginning after the first fiscal year end of the IPO. The evidence is consistent with Ritter's [1991] conjecture that investors are systematically overoptimistic about the growth prospects of IPO firms. The high discretionary accounting accruals seem to be associated with initial overoptimism of investors with subsequent revelations about the appropriateness of the accruals causing a subsequent downward revision in stock prices.
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JEL Classifications: G14, M41
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Working Paper Series
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Contact Information for
SIEW HONG
TEOH
(Contact Author)
Email address for SIEW HONG
TEOH
University of California - Paul Merage School of Business
Irvine
, CA
92697
United States
949 824 9952 (Phone)
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Contact Information for
GITA
RAO
(No e-mail address available for GITA
RAO
Colonial Management Associates
One Financial Center
12 Floor
Boston
, MA
02111
United States
617-772-3461 (Phone)
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Contact Information for
T.J.
WONG
Email address for T.J.
WONG
Chinese University of Hong Kong - School of Accountancy
Shatin, N.T.
Hong Kong
852.2609.7750 (Phone)
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