The management of nonearnings measures: Evidence from initial public offering firms

Snow Xue Han and Su‐Jane Hsieh

Journal of Business Finance & Accounting, 2025, vol. 52, issue 2, 1116-1151

Abstract: Inconsistent with the conventional view that initial public offering firms (IPOs) manage earnings upward to boost offering prices, we posit that IPOs, which are usually in the early stage of their life cycle, focus on sales growth. Using quarterly analyses, we find that both high‐tech and non‐high‐tech IPOs opportunistically manage sales upward in the pre‐IPO period. While high‐tech IPOs manage sales upward via premature revenue recognition and activities‐sales management, non‐high‐tech IPOs only engage in premature revenue recognition practice. Moreover, both subgroups spend aggressively on discretionary expenses during the pre‐IPO period. However, the two subgroups differ in their manipulation of earnings and R&D. Intangible‐intensive high‐tech IPOs not only do not engage in upward accruals earnings management but also exhibit income‐decreasing behavior through intensive R&D spending in the pre‐IPO period. In contrast, non‐high‐tech IPOs incur significant abnormal accruals to opportunistically inflate earnings in the lockup period but do not engage in aggressive R&D spending. Finally, we find subsequent operating performance reversal among IPOs engaged in earnings and nonearnings manipulation except for activities‐sales management.

Date: 2025
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