Initial Public Offering: earnings management and ownership structure

Abstract

This paper examines factors effective on investors' behavior and valuation in IPOs. One of the factors is discretionary accruals. To test the effects of "earning management before IPO" and "ownership structure" after IPO, some variables such as accruals quality, total assets, sale growth and financial leverage have been used. The sample consists of 101 firms with IPO during the years 2000 to 2010. Results indicate that discretionary accruals before IPO has the explanatory power of ownership structure after IPO, but the reverse is not so. In other words, there is no evidence to reject the direct rejection between discretionary accruals before IPO and ownership structure after it. Thus, it can be concluded that since increase of earning management before IPO leads to increase of institutional ownership, some important factors other than discretionary accruals are effective on decision making of institutional investors.

Keywords

• functional fixation
• Accruals
• Cash flows
• unexperienced investor
• return of accrual components