Earnings quality at initial public offerings

Document Information:
Title:	Earnings quality at initial public offerings
Author(s):	Ball R, Shivakumar L
Journal:	Journal of Accounting & Economics, Aug 2008, Volume: 45 Issue: 2 pp.324-349 (26 pages)
Issn:	0165-4101

Keywords:	Agency Theory, Earnings, Financial Reporting, Initial Public Offering, United Kingdom
Article type:	Research paper
DOI:	10.1016/j.jacceco.2007.12.001
Reference:	37AR725 (Permanent URL)
Abstract:	Purpose - To characterize the conservative nature of initial public offerings (IPOs). Design/methodology/approach - Questions the earnings management hypothesis of Teoh et al (1998) and their reliance on discretionary current accruals (DCA) estimates. Examines hypotheses of opportunism and of enhanced public firm reporting quality, using a sample of 393 UK IPOs between 1992 and 1999, with two sets of accounts: (1) as a private company and (2) as restated for the flotation prospectus. Constructs a model that controls for growth and IPO-related factors. Reviews the Teoh et al sample, comparing cash flow data with balance sheet data-based discretionary accruals. Findings - Finds that IPO prospectuses are conservatively presented, and that the firms had presented conservative accounts in preceding years. Detects no evidence of opportunistic earnings inflation. Similarly, reveals no strong evidence of earnings inflation by the US IPOs studied by Teoh et al. Research limitations/implications - Admits that earnings management may occur in individual cases, and may be clustered round large transactions or events, a possibility not controlled for under the Jones, or Dechow and Dichev models. Originality/value - Presents a combative contribution to the literature on earnings management, using UK data.