Do Initial Public Offering Firms Manage Accruals? Evidence from Individual Accounts

29 Pages Posted: 28 Jun 2011 Last revised: 19 Apr 2017

See all articles by Mark Cecchini

Mark Cecchini

University of South Carolina

Scott B. Jackson

University of South Carolina

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Date Written: May 1, 2011

Abstract

We examine whether initial public offering (IPO) firms exercise discretion over an individual accrual account on the balance sheet - the allowance for uncollectible accounts - and an individual accrual account on the income statement - bad debt expense. Our research design exploits a unique disclosure requirement related to these accounts (i.e., the ex post disclosure of write-offs of uncollectible accounts), which enables us to develop refined expectation models. We provide evidence that IPO firms have conservative, not aggressive, allowances in the annual periods adjacent to their stock offerings. In fact, the average IPO firm has an allowance that is over four-times leading write-offs. We also provide evidence that IPO firms record larger, not smaller, bad debt expense and are less likely to record income-increasing bad debt expense than matched non-IPO firms. These results challenge the view that IPO firms understate receivables-related accrual accounts.

Keywords: initial public offering, earnings management, allowance for uncollectible accounts, bad debt expense

JEL Classification: M13, M41, M48, G24, K22

Suggested Citation

Cecchini, Mark and Jackson, Scott B. and Liu, Xiaotao Kelvin, Do Initial Public Offering Firms Manage Accruals? Evidence from Individual Accounts (May 1, 2011). Review of Accounting Studies 17 (1) March 2012, Available at SSRN: https://ssrn.com/abstract=1873956

Mark Cecchini

University of South Carolina ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

Scott B. Jackson (Contact Author)

University of South Carolina ( email )

School of Accounting
Moore School of Business
Columbia, SC 29208
United States
(803) 777-3100 (Phone)

Xiaotao Kelvin Liu

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

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