Regulations, Earnings Management, and Post-IPO Performance: The Chinese Evidence

Journal of Banking & Finance Volume 33, Issue 1, January 2009, Pages 63–76

University of Alberta School of Business Research Paper No. 2013-673

Posted: 2 Jul 2013

See all articles by Jennifer L. Kao

Jennifer L. Kao

Independent

Donghui Wu

Hong Kong Polytechnic University

Zhifeng Yang

Stony Brook University

Date Written: June 1, 2008

Abstract

In this study, we examine whether government regulatory initiatives in China involving IPO by SOEs may have contributed to opportunistic behaviors by the issuer. We focus on two sets of IPO regulations issued between January 1, 1996 and February 11, 1999: pricing regulations, which stipulate that IPO prices be a function of accounting performance, and penalty regulations, which penalize IPO firms for overly optimistic forecasts. We find that IPO firms that report better pricing-period accounting performance have larger declines in post-IPO profitability, lower first-day stock returns and worse long-run post-IPO stock performance. Furthermore, IPO firms that make overoptimistic forecasts also have lower first-day returns and worse post-IPO stock performance. Using non-core earnings as the proxy for earnings management, we document some evidence that IPO firms that report higher pricing-period accounting performance have engaged in more income-increasing earnings management. Hence, pricing regulations may have induced IPO firms to inflate pricing-period earnings and affect the post-IPO performance negatively. On the other hand, penalty regulations have deterred IPO firms from making overoptimistic earnings forecast and therefore have a positive impact on the behavior of IPO firms.

Keywords: Initial public offerings, Earnings management, Regulations

JEL Classification: G18, L33, M41

Suggested Citation

Kao, Jennifer L. and Wu, Donghui and Yang, Zhifeng, Regulations, Earnings Management, and Post-IPO Performance: The Chinese Evidence (June 1, 2008). Journal of Banking & Finance Volume 33, Issue 1, January 2009, Pages 63–76, University of Alberta School of Business Research Paper No. 2013-673, Available at SSRN: https://ssrn.com/abstract=2276169

Donghui Wu

Hong Kong Polytechnic University ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Zhifeng Yang

Stony Brook University ( email )

Health Science Center
Level 3, Room 043
Stony Brook, NY 11794-8322
United States

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