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Effects of Audit Quality on Real and Accrual Earnings Management and Subsequent Return Performance: Evidence from IPOs

Posted: 27 Feb 2013  

Mohammad Alhadab

Al al-Bayt University; University of Leeds - Division of Accounting and Finance

Iain Clacher

University of Leeds - Leeds University Business School (LUBS)

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: February 26, 2013

Abstract

We find that IPO firms engage in real and accrual earnings management during the IPO and that big-N audit firms constrain discretionary expenses-based and accrual-based manipulations. The restriction of these forms of earnings management leads IPO firms to resort to a higher level of sales-based manipulation. Our results show that both sales-based and accrual-based earnings management predict post-IPO return underperformance, and that sales-based manipulation has the most severe negative consequences for future return performance. In addition, we find IPO firms audited by big-N audit firms experience a severe decline in post-IPO return performance due to the extensive use of sales-based manipulation that takes place during the offer year.

Keywords: Earnings management, Discretionary accruals, Real activities manipulation, Audit quality, Initial public offering, Stock return performance

Suggested Citation

Alhadab, Mohammad and Clacher, Iain and Keasey, Kevin, Effects of Audit Quality on Real and Accrual Earnings Management and Subsequent Return Performance: Evidence from IPOs (February 26, 2013). Available at SSRN: https://ssrn.com/abstract=2225409 or http://dx.doi.org/10.2139/ssrn.2225409

Mohammad Alhadab (Contact Author)

Al al-Bayt University ( email )

Faculty of Finance and Business Administration
Department of Accounting
Mafraq, 25113
Jordan
00962796811823 (Phone)

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Iain Clacher

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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