Do initial public offering firms manage accruals? Evidence from individual accounts

Do initial public offering firms manage accruals? Evidence from individual accounts We examine whether initial public offering (IPO) firms exercise discretion over an individual accrual account on the balance sheet—the allowance for uncollectible accounts—and an individual accrual account on the income statement—bad debt expense. Our research design exploits a unique disclosure requirement related to these accounts (i.e., the ex post disclosure of write-offs of uncollectible accounts), which enables us to develop refined expectation models. We provide evidence that IPO firms have conservative, not aggressive, allowances in the annual periods adjacent to their stock offerings. In fact, the average IPO firm has an allowance that is over four-times leading write-offs. We also provide evidence that IPO firms record larger, not smaller, bad debt expense and are less likely to record income-increasing bad debt expense than matched non-IPO firms. These results challenge the view that IPO firms understate receivables-related accrual accounts. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Do initial public offering firms manage accruals? Evidence from individual accounts

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Publisher
Springer US
Copyright
Copyright © 2011 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-011-9160-9
Publisher site
See Article on Publisher Site

Abstract

We examine whether initial public offering (IPO) firms exercise discretion over an individual accrual account on the balance sheet—the allowance for uncollectible accounts—and an individual accrual account on the income statement—bad debt expense. Our research design exploits a unique disclosure requirement related to these accounts (i.e., the ex post disclosure of write-offs of uncollectible accounts), which enables us to develop refined expectation models. We provide evidence that IPO firms have conservative, not aggressive, allowances in the annual periods adjacent to their stock offerings. In fact, the average IPO firm has an allowance that is over four-times leading write-offs. We also provide evidence that IPO firms record larger, not smaller, bad debt expense and are less likely to record income-increasing bad debt expense than matched non-IPO firms. These results challenge the view that IPO firms understate receivables-related accrual accounts.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jun 4, 2011

References

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