Dual Roles of Institutional Investors in pre and post IPO Earnings Management

Abstract

Institutional investors’ behavior toward earnings management may be different before and after initial public offering (IPO). Institutional investors have strong incentive for earnings management before IPOs to sell their securities at a higher price than the intrinsic value, while they perform monitoring function to restrain earnings management after IPOs. Thus, the purpose of this study is to investigate the dual roles of institutional investors in earnings management before and after IPOs. To achieve this purpose, the data is collected from 55 IPO firms listed in Tehran Stock Exchange for the period of 2008 to 2015 and analyzed based on panel data regression. To measure earnings management based on discretion accruals, the Kothari model has been used. The results indicate that there is a positive and significant relation between institutional investors and earnings management before IPO, however, there is not such a relation after IPO. Accordingly, it can be claimed that institutional investors have incentive for earnings management before IPO to sell their securities at a higher price than the intrinsic value, but they have no incentive to do this after IPO.

Keywords

• institutional investors
• initial public offering
• earnings management