The Relevance of Accounting Information in a Stock Market Bubble: Evidence from Internet IPOs

31 Pages Posted: 12 May 2010

See all articles by Neil Bhattacharya

Neil Bhattacharya

Singapore Management University - School of Accountancy; Southern Methodist University (SMU) - Accounting Department

Elizabeth A. Demers

University of Lausanne - Department of Accounting and Control

Philip Joos

Tilburg University

Date Written: February 1, 2009

Abstract

Prior research shows that accounting information is relevant for stock valuation, failure prediction, performance evaluation, optimal contracting, and other decision-making contexts in relatively stable market settings. By contrast, accounting's role during stock market bubbles such as those involving a revolutionary emerging technology is the subject of considerable debate, and prominent market observers have alleged that outdated and flawed accounting practices contributed to the crash of the Internet-led high-tech bubble of the late 1990s. We address the issue of whether accounting data is informative in a stock market bubble by examining its failure prediction ability in the context of Internet IPOs, one of the most egregious and economically significant sectors of the high tech bubble. Our setting of young start-up firms is one in which there is relatively little room for managerial discretion with respect to accounting accruals; Internet firms' accounting earnings closely approximate operating cash flows. Yet in contrast to widespread criticisms of accounting and its alleged role in fueling the bubble, we find that accounting variables are highly informative for failure prediction; specifically, they are significant in explaining ex post realized Internet IPO failures. Using an existing IPO failure prediction methodology and two alternative definitions of innovative IPOs, we further show that ex ante, out-of-sample Internet IPO failure forecasts are associated with economically and statistically significant hedge returns. Our analyses suggest that the traditional financial reporting system could serve as an anchor during speculative bubbles.

Suggested Citation

Bhattacharya, Neil and Demers, Elizabeth A. and Joos, Philip, The Relevance of Accounting Information in a Stock Market Bubble: Evidence from Internet IPOs (February 1, 2009). Journal of Business Finance & Accounting, Vol. 37, Issue 3-4, pp. 291-321, April/May 2010. Available at SSRN: https://ssrn.com/abstract=1604802 or http://dx.doi.org/10.1111/j.1468-5957.2009.02144.x

Neil Bhattacharya (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3082 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://www.cox.smu.edu

Elizabeth A. Demers

University of Lausanne - Department of Accounting and Control ( email )

UNIL-Dorigny
Anthropole
Lausanne, 1015
Switzerland

Philip Joos

Tilburg University ( email )

School of Economics and Management
Warandelaan 2
Tilburg, 5000 LE
Netherlands
31 13 4668716 (Phone)
31 13 4668001 (Fax)

HOME PAGE: http://www.tilburguniversity.edu/webwijs/show/philjoos/

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