The sharpest tool in the shed: IPO financial statement management of STEM vs. non-STEM firms

Tatiana Fedyk (), Zvi Singer () and Mark Soliman ()
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Tatiana Fedyk: University of San Francisco
Zvi Singer: HEC Montreal
Mark Soliman: University of Southern California

Review of Accounting Studies, 2017, vol. 22, issue 4, No 3, 1581 pages

Abstract: Abstract The valuation of STEM (science, technology, engineering, and math) firms has recently gained attention in the literature. Research has shown that, for valuation of STEM firms, accounting items such as sales growth and R&D expenditures matter more than bottom-line earnings. We examine whether, around the time of the IPO, STEM managers apply discretion over the accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in valuing STEM firms and that managers respond by managing those items rather than bottom-line earnings as in prior research. We find that future stock returns of STEM firms are negatively associated with sales management and not with abnormal accruals as for non-STEM firms. Our results illuminate the differential behavior of STEM managers and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.

Keywords: STEM firms; Initial public offering; Discretion over accounting items; IPO valuation; Earnings management (search for similar items in EconPapers)
JEL-codes: G14 G32 K22 M13 M41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s11142-017-9412-4

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