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Earnings Management and the Long‐Run Market Performance of Initial Public Offerings
Author(s) -
Teoh Siew Hong,
Welch Ivo,
Wong T.J.
Publication year - 1998
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00079
Subject(s) - initial public offering , accrual , issuer , earnings management , business , quartile , equity (law) , earnings , cash , stock (firearms) , accounting , financial system , monetary economics , finance , economics , mechanical engineering , confidence interval , statistics , mathematics , political science , law , engineering
Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive” quartile of earnings managers have a three‐year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications.