Role of Underwriters in Restraining Earnings Management in Initial Public Offerings
Hei Wai Lee
University of Michigan at Dearborn - School of Management
Yan Alice Xie
University of Michigan at Dearborn
University of Hawaii at Manoa
September 9, 2011
Journal of Applied Business Research, Forthcoming
We investigate the relationship between underwriter reputation and earnings management of IPO firms over the period of 1991-2005. We find that IPO firms engage in less earnings management if they are underwritten by prestigious investment bankers. Furthermore, the role of prestigious underwriters in restraining earnings management of IPO issuers do not change during the Internet Bubble period or after the passage of the Sarbanes-Oxley Act (SOX). The findings support the certification role of underwriters in the IPO process.
We also document that firms going public in the post-SOX period engage in less earnings management compared to firms going public in the pre-SOX period. Further findings suggest that the changing objectives of venture capitalists may explain the reduction in the level of earnings management of IPO firms following the passage of SOX.
Number of Pages in PDF File: 25
Keywords: Earnings management, Underwriter reputation, IPO firms, Internet bubble, Sarbanes-Oxley Act
JEL Classification: G24, M41
Date posted: February 29, 2012