Do initial public offering firms manage accruals? Evidence from individual accounts

Mark Cecchini (), Scott B. Jackson () and Xiaotao Liu ()
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Mark Cecchini: University of South Carolina
Scott B. Jackson: University of South Carolina
Xiaotao Liu: Northeastern University

Review of Accounting Studies, 2012, vol. 17, issue 1, No 2, 22-40

Abstract: Abstract We examine whether initial public offering (IPO) firms exercise discretion over an individual accrual account on the balance sheet—the allowance for uncollectible accounts—and an individual accrual account on the income statement—bad debt expense. Our research design exploits a unique disclosure requirement related to these accounts (i.e., the ex post disclosure of write-offs of uncollectible accounts), which enables us to develop refined expectation models. We provide evidence that IPO firms have conservative, not aggressive, allowances in the annual periods adjacent to their stock offerings. In fact, the average IPO firm has an allowance that is over four-times leading write-offs. We also provide evidence that IPO firms record larger, not smaller, bad debt expense and are less likely to record income-increasing bad debt expense than matched non-IPO firms. These results challenge the view that IPO firms understate receivables-related accrual accounts.

Keywords: Initial public offering; Earnings management; Allowance for uncollectible accounts; Bad debt expense (search for similar items in EconPapers)
JEL-codes: G24 K22 M13 M41 M48 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s11142-011-9160-9

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