When are IPO Firms' Income-Increasing Accruals Informative?*

50 Pages Posted: 6 Sep 2007 Last revised: 15 Sep 2008

See all articles by Melissa F. Lewis-Western

Melissa F. Lewis-Western

Brigham Young University - Marriott School of Business

Date Written: July 8, 2008

Abstract

This paper investigates whether some initial public offering (IPO) managers report informative (as opposed to opportunistic) income-increasing accruals and the extent to which market participants differentially price informative accruals. I find significantly more persistent income-increasing accruals and non-correlation with future restatements when the firm is underwritten by a more reputable investment bank, and the converse (less persistence and more restatements) when firms employ less reputable investment banks. The market however, does not appear to be fooled; IPO security prices only increase in "informative" accruals. Furthermore, IPO accruals are unrelated to subsequent abnormal returns, consistent with appropriate pricing at the IPO.

Keywords: initial public offering, earnings management, restatement, earnings quality, investment banking

JEL Classification: G14, G24, M41, M43

Suggested Citation

Lewis-Western, Melissa Fay, When are IPO Firms' Income-Increasing Accruals Informative?* (July 8, 2008). Available at SSRN: https://ssrn.com/abstract=1012362 or http://dx.doi.org/10.2139/ssrn.1012362

Melissa Fay Lewis-Western (Contact Author)

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

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