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The Sharpest Tool in the Shed: IPO Financial Statement Management of STEM vs. Non-STEM firms

63 Pages Posted: 30 Mar 2011 Last revised: 2 Jun 2017

Tatiana Fedyk

University of San Francisco

Zvi Singer

HEC Montreal

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: March 12, 2017

Abstract

The valuation of STEM (Science, Technology, Engineering and Math) firms has gained attention in the literature over the past two decades. Research has shown that for valuation of STEM firms, accounting items such as sales growth and R&D expenditures are more important than bottom-line earnings. In this paper, we examine whether, around the time of the IPO, managers of STEM firms apply discretion over the same accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in determining market value of STEM firms and that managers respond by managing those items rather than bottom-line earnings. This is in contrast to findings in the literature of a bottom-line earnings management by IPO firms; wherein STEM firms are not examined separately. Further, we find that the negative association between abnormal accruals and future stock returns found in prior research is limited to non-STEM firms, whereas for STEM firms, stock returns are associated with sales management. Our results shed light on the differential behavior of STEM vs. non-STEM mangers and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.

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

Suggested Citation

Fedyk, Tatiana and Singer, Zvi and Soliman, Mark T., The Sharpest Tool in the Shed: IPO Financial Statement Management of STEM vs. Non-STEM firms (March 12, 2017). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1798205 or http://dx.doi.org/10.2139/ssrn.1798205

Tatiana Fedyk

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

Zvi Singer

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
514-340-1847 (Phone)

Mark T. Soliman (Contact Author)

University of Southern California - Marshall School of Business ( email )

Los Angeles, CA 90089
United States

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