Do retail and institutional investors react differently to earnings management? Evidence from Indian IPOs

Abstract

Purpose

This study investigates the impact of pre-IPO earnings management on investor demand in the Indian IPO market. It also examines whether earnings management by issuer firms affects IPO valuation, a topic that is underexplored in accounting research.

Design/methodology/approach

The study uses the data of 310 IPOs from India during the period 2000–2021. The association between pre-IPO earnings management with investor demand and valuation is tested using cross-sectional ordinary least squares regression models with heteroscedasticity-robust standard errors.

Findings

The study finds that the degree of pre-IPO earnings management impacts retail investor demand, measured as their over-subscription multiple. Pre-IPO earnings management is unrelated to institutional investor bidding. Further, this paper suggests no relation between pre-IPO earnings management and IPO valuation.

Research limitations/implications

Future studies could explore various other forms of earnings management and their impact on investor demand and valuation.

Practical implications

The findings of this study will help the investors and regulators to understand the practice of earnings management among IPO firms and how it is related to IPO demand and valuation.

Originality/value

This study contributes to the existing literature on IPO-earnings management and investor demand by documenting that issuer firms engage in earnings management to influence investor demand, particularly retail investor demand. Analysis of IPO valuation reveals that earnings management is mostly unrelated to IPO valuation, contrary to the general perception in the literature.

Citation

Priyesh, V.P. and Jijo, L.P.J. (2023), "Do retail and institutional investors react differently to earnings management? Evidence from Indian IPOs", Journal of Applied Accounting Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAAR-10-2022-0281