Seduction of accounting manipulation? Earnings management during initial public offerings: Empirical evidence from Helsinki stock exchange IPOs during 1994–2002

Abstract

Present master thesis objective is to examine whether initial public offering (IPO) companies manipulate their earnings during listing period. In this study earnings manipulation, in other words earnings management is defined by accounting accruals. Thus, in focus at present study are companies´ discretionary accruals in the annual periods immediately before and after stock offerings and whether those accruals are earnings increasing. The motivation for this thesis derives from the lag of prior studies made by Finnish market data and hence possibility to generate some scientific contribution. Data set for this thesis consists of 48 Finnish IPOs during 1994–2002 and have acquired from Balance Consulting data base. Earnings management is studied using modified DeAngelo (1986) and Jones (1991) models. Furthermore, the relation between earnings management and company as well as industry specific factors are examined using correlation and regression analysis. The results of present study can be divided in three subcategories. At the first level, study suggests that IPO companies experience superior operating performance in pre–issue period in contrast to post–issue corresponding. At the second level, study results that asset scaled discretionary current accruals before initial public offerings are negative and rise to a peak in one year after IPO and normalize in post–issue years. And the third level, study argue that accounting accrual phenomenon is likely to be at least partly attributable to firm and industry specific factors and provide evidence that firms experience different discretionary current accruals behavior during their listings. To conclude, thesis results suggest it is more likely for firms undertaking initial public offerings to manipulate of earnings to realize higher return by issuing stocks at higher price.