Strategic Conservative Earnings Management of Technology Firms: Evidence from the IPO Market

33 Pages Posted: 17 Nov 2012

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Mingming Zhou

University of Colorado, Colorado Springs - College of Business

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Date Written: December 2012

Abstract

In this paper, we investigate the conservative earnings management strategies of technology firms in the IPO market. We hypothesize that technology IPOs, due to their fewer tangible assets, more information asymmetry, and higher uncertainties of future cash flows, tend to have higher litigation risk. At equilibrium, technology firms are more motivated to strategically employ conservative earnings management during the IPO process, to mitigate their higher litigation risk. Using a sample of U.S. IPOs, we find that technology IPOs, on average, involve significantly more conservative earnings management, especially during the bubble periods. Our results also show that the conservative earnings management strategies of technology firms tends to have a greater impact on their underpricing than for non‐tech firms, and thus effectively reduce their risk of being a target in the securities class action lawsuits.

Keywords: Conservative Earnings Management, Technology IPOs, Underpricing, Litigation Risk

JEL Classification: K22, G14, G32, M41

Suggested Citation

Francis, Bill and Zhou, Mingming and Hasan, Iftekhar, Strategic Conservative Earnings Management of Technology Firms: Evidence from the IPO Market (December 2012). Financial Markets, Institutions & Instruments, Vol. 21, Issue 5, pp. 261-293, 2012, Available at SSRN: https://ssrn.com/abstract=2177107 or http://dx.doi.org/10.1111/fmii.12001

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Mingming Zhou

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States
1-719-255-5153 (Phone)

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

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