Earnings Management And Initial Public Offerings: An Empirical Analysis

Abstract

This paper studies the presence of earnings management in initial public offerings (IPOs) of French firms. When the aim of earnings management is to increase the attractiveness of the offered shares it needs to go undetected by market participants. This invisibility makes earnings management difficult to detect in the income statement and the balance sheet, thus investors would benefit from other information that reveals the probability of earnings management. Managers’ and owners’ incentives for managing earnings are used to assess the likelihood that earnings management is used before the IPO. Earnings management is tested by observing time-series profiles of accruals. The sample consists of French firms that went public in the years 1995 to 2008 on the Euronext Paris Exchange. The results suggest that IPO firms with the highest discretionary current accruals significantly underperformed, compared to equivalent companies in the third year following the IPOs.