Accounting Papers

Document Type

Journal Article

Date of this Version

5-2016

Publication Source

Management Science

Volume

62

Issue

5

Start Page

1316

Last Page

1338

DOI

10.1287/mnsc.2015.2179

Abstract

Newly public companies tend to exhibit abnormally high accruals in the year of their initial public offering (IPO). Although the prevailing view in the literature is that these accruals are caused by opportunistic misreporting, we show that these accruals do not appear to benefit managers and instead result from the normal economic activity of newly public companies. In particular, and in contrast to the notion that managers benefit from inflating accruals through an inflated issue price, inflated post-IPO equity values, and increased insider trading profits, we find no evidence of a relation between abnormal accruals and these outcomes. Instead, consistent with these accruals resulting from normal economic activity, we find that these accruals are attributable to the investment of IPO proceeds in working capital and that controlling for the amount of IPO proceeds invested in working capital produces a more powerful accrual-based measure of misreporting.

Keywords

misreporting, earnings management, financial reporting quality, accruals, incentives, insider trading, initial public offering, new issues puzzle, investment

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Date Posted: 27 November 2017

This document has been peer reviewed.