Abnormal Accruals in Newly Public Companies: Opportunistic Misreporting or Economic Activity?

Christopher Armstrong (), George Foster () and Daniel Taylor ()
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Christopher Armstrong: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
George Foster: Graduate School of Business, Stanford University, Stanford, California 94305
Daniel Taylor: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104

Management Science, 2016, vol. 62, issue 5, 1316-1338

Abstract: Newly public companies tend to exhibit abnormally high accruals in the year of their initial public offering (IPO). Although the prevailing view in the literature is that these accruals are caused by opportunistic misreporting, we show that these accruals do not appear to benefit managers and instead result from the normal economic activity of newly public companies. In particular, and in contrast to the notion that managers benefit from inflating accruals through an inflated issue price, inflated post-IPO equity values, and increased insider trading profits, we find no evidence of a relation between abnormal accruals and these outcomes. Instead, consistent with these accruals resulting from normal economic activity, we find that these accruals are attributable to the investment of IPO proceeds in working capital and that controlling for the amount of IPO proceeds invested in working capital produces a more powerful accrual-based measure of misreporting. This paper was accepted by Gérard Cachon, accounting .

Keywords: misreporting; earnings management; financial reporting quality; accruals; incentives; insider trading; initial public offering; new issues puzzle; investment (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (21)

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