Abstract

http://ssrn.com/abstract=1798205
 


 



The Sharpest Tool in the Shed: An Examination of Financial Statement Management Tools during IPOs


Zvi Singer


McGill University - Desautels Faculty of Management

Tatiana Fedyk


University of San Francisco

Mark T. Soliman


University of Southern California - Marshall School of Business

September 5, 2013


Abstract:     
The current literature presents conflicting evidence as to whether IPO firms manage earnings. Two major shortcomings of prior studies are their assumptions that: 1) investors primarily care about bottom-line earnings; and 2) all firms, regardless of their operating models, only manage earnings. We relax those assumptions by examining the application of discretion over various accounting items across different industry sectors. We find cross-sectional variation in the application of discretion over sales, R&D (R&D overinvestment), and other earnings items, with discretion being significantly associated with the relative importance of the items for IPO valuation. We further show that sales growth possesses the greatest value relevance, and the majority of IPO firms correspondingly manage sales. Lastly, we show that managed sales, and to a lesser degree managed other earnings items, are negatively associated with future stock returns. Overall, we provide robust evidence of use of discretion by IPO firms over various accounting items, depending on the firm’s operating model.

Number of Pages in PDF File: 49

Keywords: Initial public offering; discretion over accounting items; IPO valuation; earnings management.

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Date posted: March 30, 2011 ; Last revised: September 11, 2013

Suggested Citation

Singer, Zvi and Fedyk, Tatiana and Soliman, Mark T., The Sharpest Tool in the Shed: An Examination of Financial Statement Management Tools during IPOs (September 5, 2013). Available at SSRN: http://ssrn.com/abstract=1798205 or http://dx.doi.org/10.2139/ssrn.1798205

Contact Information

Zvi Singer
McGill University - Desautels Faculty of Management ( email )
1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada
(514) 398-6240 (Phone)
Tatiana Fedyk
University of San Francisco ( email )
2130 Fulton Street
San Francisco, CA 94117
United States
Mark T. Soliman (Contact Author)
University of Southern California - Marshall School of Business ( email )
Los Angeles, CA 90089
United States
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