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Real and Accrual Earnings Management and IPO Failure Risk

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

This paper analyzes the relationship between real and accrual earnings management activities and IPO failure risk. Recent research shows that IPO firms manage earnings upward around the offer year utilizing real and accrual earnings management activities (e.g., Wongsunwai, 2012) and that these activities have severe negative consequences for future stock returns and operating performance (e.g., Cohen and Zarowin, 2010; Kothari et al., 2012). Thus, we predict IPO firms that engaged in higher levels of real and accrual earnings management will exhibit a higher probability of failure and lower survival rates. We test this hypothesis based on a sample of 570 IPO firms that went public over the period 1998-2008. We find evidence that IPO firms manipulate earnings upward utilizing real and accrual earnings management around the IPO. We also find that IPO firms with higher levels of real and accrual earnings management during the IPO year have a higher probability of IPO failure and lower survival rates in subsequent periods.

Keywords: Initial Public Offerings, IPO failure, real activities, accounting accruals, accounting choices

Suggested Citation

Alhadab, Mohammad and Clacher, Iain and Keasey, Kevin, Real and Accrual Earnings Management and IPO Failure Risk (February 26, 2013). Available at SSRN: https://ssrn.com/abstract=2225411 or http://dx.doi.org/10.2139/ssrn.2225411

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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