Industry-Average Earnings Management and IPO Pricing

Joseph R. Rakestraw, Raman Kumar and John J. Maher
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Joseph R. Rakestraw: Florida Atlantic University, School of Accounting, 119 Kaye Hall, 777 Glades Road, Boca Raton, FL 33431, USA
Raman Kumar: Virginia Tech, 1016 Pamplin Hall, Blacksburg, VA 24061, USA
John J. Maher: Virginia Tech, 3007 Pamplin Hall, Blacksburg, VA 24061, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2019, vol. 22, issue 04, 1-46

Abstract: We examine the effects of signed industry-average earnings management on the pricing of initial public offerings (IPOs). We posit that the variation in an IPOs earnings management is related to industry-average earnings management and, therefore, provides useful information regarding the IPO valuation. We find that higher industry-average earnings management negatively affects the pre-issuance price update and the initial return of IPOs. Our findings lend support to the partial adjustment phenomenon of IPO pricing which suggests information that influences valuation is partially incorporated in the initial offer price and more fully incorporated in the share price during the first-day of secondary market trading.

Keywords: Earnings management; discretionary accruals; initial public offerings; information spillover; partial adjustment phenomenon (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0219091519500231

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