Earnings Management and Delisting Risk of IPO Firms

摘要

Earnings management is a corporate decision subject to costs. Both earnings management in the IPO process and the ex ante delisting risk of newly issued firms are related to firm fundamental. With a sample of IPOs between 1980 and 1999, we find that the degree of earnings management possesses significant predictive power on IPO failure. IPO firms associated with aggressive earnings management are more likely to delist for performance failure, and they tend to delist sooner. Furthermore, we find that IPO firms associated with conservative earnings management are more likely to be merged or acquired and they provide abnormal investment returns. Our results also show that IPO issuers manage earnings in response to market demand. Market-wide earnings management of IPO firms interacts with the IPO cycle documented by Lowry and Schwert (2002).