Earnings Management and the Long‐Run Market Performance of Initial Public Offerings

Siew Hong Teoh, Ivo Welch, T.J. Wong

The Journal of Finance · 1998 · 2.4K citations · 26 references

DOIFull text

Open access

Concepts

TL;DR

IPO issuers can inflate earnings through positive accruals. High IPO‑year accruals predict a 20% lower three‑year aftermarket return and 20% fewer seasoned equity offerings, with statistically significant effects.

Abstract

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.

References

26