Do IPO Firms Misclassify Expenses? Implications for IPO Price Formation and Post-IPO Stock Performance

64 Pages Posted: 11 May 2020 Last revised: 23 Jul 2020

See all articles by Xiaotao Kelvin Liu

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Biyu Wu

University of Nebraska at Lincoln - School of Accountancy

Date Written: January 24, 2020

Abstract

This study investigates whether IPO firms inflate “core” earnings through classification shifting (i.e., misclassifying core expenses as income-decreasing special items) immediately prior to IPOs. We provide initial evidence that IPO firms engage in classification shifting in the pre-IPO period. Using hand-collect price and share information from IPO prospectuses, we find that pre-IPO classification shifting is positively associated with the price revision from the mid-point of the initial price range to the final offer price, suggesting that pre-IPO classification shifting influences IPO price formation. Furthermore, we find that pre-IPO classification shifting is negatively associated with post-IPO stock returns. Overall, our findings caution investors, auditors, and regulators that classification shifting, a seemingly innocuous accounting maneuver, can mislead investors in their IPO valuation and is associated with post-IPO underperformance.

Keywords: initial public offerings, classification shifting, price formation, post-IPO performance

JEL Classification: M40, M41

Suggested Citation

Liu, Xiaotao Kelvin and Wu, Biyu, Do IPO Firms Misclassify Expenses? Implications for IPO Price Formation and Post-IPO Stock Performance (January 24, 2020). Management Science, Forthcoming, Northeastern U. D’Amore-McKim School of Business Research Paper No. 3573564, Available at SSRN: https://ssrn.com/abstract=3573564

Xiaotao Kelvin Liu (Contact Author)

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

Biyu Wu

University of Nebraska at Lincoln - School of Accountancy ( email )

Lincoln, NE 68588
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
130
Abstract Views
583
rank
258,677
PlumX Metrics