Role of Underwriters in Restraining Earnings Management in Initial Public Offerings

2012. Journal of Applied Business Research 28 (4): 709-724.

25 Pages Posted: 29 Feb 2012 Last revised: 1 Mar 2017

Hei Wai Lee

University of Michigan at Dearborn - School of Management

Yan Alice Xie

University of Michigan at Dearborn

Jian Zhou

University of Hawaii at Manoa

Date Written: September 9, 2011

Abstract

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.

Keywords: Earnings management, Underwriter reputation, IPO firms, Internet bubble, Sarbanes-Oxley Act

JEL Classification: G24, M41

Suggested Citation

Lee, Hei Wai and Xie, Yan Alice and Zhou, Jian, Role of Underwriters in Restraining Earnings Management in Initial Public Offerings (September 9, 2011). 2012. Journal of Applied Business Research 28 (4): 709-724.. Available at SSRN: https://ssrn.com/abstract=2012560

Hei Wai Lee

University of Michigan at Dearborn - School of Management ( email )

4901 Evergreen Road
Dearborn, MI 48128-1491
United States
313-593-5524 (Phone)
313-593-5636 (Fax)

Yan Xie (Contact Author)

University of Michigan at Dearborn ( email )

Dearborn, MI
United States

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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