When and Why Do IPO Firms Manage Earnings?

57 Pages Posted: 18 Dec 2015 Last revised: 25 Apr 2017

See all articles by Yonca Ertimur

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting

Ewa Sletten

The Ohio State University

Jayanthi Sunder

University of Arizona - Eller College of Management

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 24, 2017

Abstract

There is significant disagreement about whether, when and why IPO firms manage earnings. We contribute to the literature by precisely identifying the timing and motives behind earnings management by IPO firms. We emphasize that the period around IPO is characterized by two distinct events: the IPO itself and the lockup expiration. Both the raising of capital at the IPO and the large-scale exit by pre-IPO shareholders at lockup expiration approximately 180 days later create incentives for firms to manage earnings. To disentangle the effect of these events, we examine quarterly, rather than annual, abnormal accruals. We find no evidence of income-increasing earnings management before the IPO. However, IPO firms exhibit positive abnormal accruals in the quarter before and the quarter of the lockup expiration. Positive abnormal accruals are concentrated in less scrutinized firms and firms with high expected selling by pre-IPO shareholders. Our results hold after controlling for the investment of IPO proceeds in the working capital and suggest that the positive abnormal accruals in the IPO year and long-run IPO underperformance documented by Teoh, Welch and Wong (1998) are attributable to earnings management around lockup expiration.

Keywords: Earnings management, IPO, IPO lockup, abnormal accruals

JEL Classification: G10, G30, M41

Suggested Citation

Ertimur, Yonca and Sletten, Ewa and Sunder, Jayanthi and Weber, Joseph Peter, When and Why Do IPO Firms Manage Earnings? (April 24, 2017). Available at SSRN: https://ssrn.com/abstract=2704621 or http://dx.doi.org/10.2139/ssrn.2704621

Yonca Ertimur

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Ewa Sletten (Contact Author)

The Ohio State University ( email )

Fisher Hall
2100 Neil Avenue
Columbus, OH 43210
United States
6142922451 (Phone)

Jayanthi Sunder

University of Arizona - Eller College of Management ( email )

School of Accountancy
1130 E Helen St.
Tucson, AZ 85721
United States
520-626-8489 (Phone)

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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