Title: Can corporate governance discipline opportunistic earnings management during IPO process?

Authors: Hui-wen Tang

Addresses: Department of Insurance, Tamkang University, No. 151, Yingzhuan Rd., Danshiu Dist., New Taipei City 25137, Taiwan

Abstract: This study investigates whether corporate governance can discipline opportunistic earnings management during IPO process and thus enhance long-run stock returns. Using a sample of IPOs in Taiwan, the study shows that there is a negative relation between pre-IPO discretionary current accruals (DCAs) and post-issue stock performance. These findings suggest that though corporate managers might mislead the market by accrual management during IPO process, such as accelerating the recognition of revenues or deferring expenses, issuers cannot always manipulate accounting discretion to sustain their earnings. Most importantly, the results of the study demonstrate that corporate governance can deter the abuse of accounting discretion during IPO process, and thus reduce potential losses of investors who were temporarily deceived by opportunistic earnings management. Notably, in family-controlled firms, increasing institutional ownership or the presence of venture capitalists will aggravate stock reversal due to earnings management, which is different from the supervising effect on non-family controlled firms.

Keywords: corporate governance; opportunistic earnings management; family control; initial public offerings; IPOs; stock performance; revenue management; long-run stock returns; Taiwan; discretionary current accruals; post-issue stock performance; accrual management; accounting discretion; family firms.

DOI: 10.1504/IJRM.2012.050384

International Journal of Revenue Management, 2012 Vol.6 No.3/4, pp.199 - 220

Published online: 17 Nov 2012 *

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