Earnings Management and the Long-Term Market Performance of Initial Public Offerings in Poland

Joanna Lizińska () and Leszek Czapiewski ()
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Joanna Lizińska: Poznań University of Economics and Business
Leszek Czapiewski: Poznań University of Economics and Business

A chapter in Finance and Sustainability, 2018, pp 121-134 from Springer

Abstract: Abstract Quality of earnings is one of the most hotly discussed problems in contemporary finance and accounting. Many studies for developed markets concluded that companies often report earnings inflated by accruals or real activities. Such practices seem to be especially significant around important corporate events. One such milestone in the corporate lifecycle is the initial public offering of equity (IPOs). IPO companies usually have a short financial history and key accounting numbers such as earnings have a relatively strong influence on the IPO pricing. On the other hand, monitoring procedures seem to be more efficient for public than for private companies which has a potential to limit excessive manipulation. This research concentrates on the pervasiveness of earnings management and describing its long-term consequences for issuers in Poland. As companies are obviously not eager to inform about artificially inflated earnings, earnings quality was approximated with discretionary accruals with the cross-sectional version of the Jones, modified Jones, McNichols, and Ball-Shivakumar models. Long-term IPO abnormal performance was measured with the buy-and-hold approach. Firms engaged in income-increasing practices in the year of going public and some companies inflated earnings with accruals even for the year prior IPO. The results suggest that IPO companies that managed earnings more aggressively experienced worse abnormal long-term market performance. However, the difference between returns between firms with lower and higher discretionary accruals was not immense in many investment periods which is an argument for expanding and continuation of the research for Poland.

Date: 2018
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DOI: 10.1007/978-3-319-92228-7_11

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