Earnings management and issue characteristics: an empirical analysis of IPOs in India

Abstract

Purpose

This study aims to examine earnings management around initial public offerings (IPOs) in India. It also explores the influence of issue characteristics on earnings management around the IPOs.

Design/methodology/approach

A sample of 511 IPOs that came during April 2003-March 2019 is studied for calculating earnings management for pre-issue, issue and post-issue years. Using Cross-Sectional Modified Jones Model, the paper presents earnings management on the basis of three proxies i.e. discretionary accruals, discretionary current accruals and discretionary long-term accruals. The influence of issue characteristics on earnings management practised around the IPOs is also observed through correlation and multiple regression analysis.

Findings

The paper finds that earnings management is abnormally high during the issue year compared with pre-issue and post-issue years. It also unveils that profitability, premium, age, and size of the issuer significantly determine the level of pre-issue and issue year earnings management practised by Indian IPO issuers.

Research limitations/implications

The findings are useful to stakeholders (potential investors, analysts and regulators) to observe, assess and understand the quality of financial numbers that are based on fallacious disclosure of accounting figures. It provides insight into the possibilities of managed earnings around the issue that could influence investors’ decision-making. Further, the study reflects the efficacy of Indian regulatory norms for IPOs.

Originality/value

To the authors’ knowledge, it is the only Indian study that had used an extensive data set of about two decades to calculate earnings management during pre-issue, issue and post-issue years. The uniqueness of the study further lies in three proxies of earnings management representing short-term and long-term accruals. Moreover, it is the first study to observe the influence of IPO issue characteristics on earnings management.

Citation

Mangala, D. and Dhanda, M. (2023), "Earnings management and issue characteristics: an empirical analysis of IPOs in India", Journal of Financial Reporting and Accounting, Vol. 21 No. 3, pp. 553-574. https://doi.org/10.1108/JFRA-01-2021-0006