The Valuation, Revenue Management, and Subsequent Financial Restatement of IPO Firms

Abstract

We demonstrate that investors in initial public offering (IPO) firms value revenues and that IPO managers report revenues opportunistically in the fiscal year just prior to the offer. We also find that these pre-IPO firm financial statements are more likely to be subsequently restated. Our results are consistent with the incentives of managers to report revenues opportunistically outweighing the higher monitoring and regulatory scrutiny pre-IPO. Our findings are in contrast to those presented in Venkataraman, Weber, and Willenborg (2008) and Ball and Shivakumar (2008) who find evidence of more conservative reporting by IPO firms. We note that these two studies use abnormal accruals to reach their inferences, a financial metric that Armstrong, Foster, and Taylor (2016) demonstrate is not value-relevant to IPO investors. Extending Armstrong et al. (2016), we provide evidence that discretionary revenue is value-relevant to IPO investors.

Keywords: Earnings Management, Accruals, Initial Public Offering, Restatements, Revenue Management

JEL Classification: M41, M42