Earnings management and IPO anomalies in China

Earnings management and IPO anomalies in China This paper empirically examines the impact of earnings management and investor sentiment on IPO anomalies using a sample of 506 Chinese IPOs issued over the 1998–2003 period. We develop a parsimonious pricing model in which both the offer price and the short-term aftermarket price are influenced by the use of earnings management, and show that the offer price can be below the fair price while the short-term equilibrium price in the aftermarket can be overvalued due to investor sentiment. Consistent with the overreaction hypothesis, the empirical results reveal a positive relation between the initial return and managed accruals and a negative relation between the long-term stock performance and the initial return. Earnings management appears to generate a pattern where the initial price following an IPO tends to be inflated by overreaction in the secondary market but adjusts to its fundamental level in the long run. These findings are robust across a variety of test specifications. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Earnings management and IPO anomalies in China

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Publisher
Springer US
Copyright
Copyright © 2012 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-012-0334-8
Publisher site
See Article on Publisher Site

Abstract

This paper empirically examines the impact of earnings management and investor sentiment on IPO anomalies using a sample of 506 Chinese IPOs issued over the 1998–2003 period. We develop a parsimonious pricing model in which both the offer price and the short-term aftermarket price are influenced by the use of earnings management, and show that the offer price can be below the fair price while the short-term equilibrium price in the aftermarket can be overvalued due to investor sentiment. Consistent with the overreaction hypothesis, the empirical results reveal a positive relation between the initial return and managed accruals and a negative relation between the long-term stock performance and the initial return. Earnings management appears to generate a pattern where the initial price following an IPO tends to be inflated by overreaction in the secondary market but adjusts to its fundamental level in the long run. These findings are robust across a variety of test specifications.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 1, 2013

References

  • Initial public offerings, accounting choices, and earnings management
    Aharony, J; Lin, CJ; Leob, MP
  • Earnings quality at initial public offerings
    Ball, R; Shivakumar, L
  • A model of investor sentiment
    Barberis, N; Shleifer, A; Vishny, R
  • A model of the demand for investment banking advising and distribution services for new issues
    Baron, D
  • Underpricing and long-term performance of IPOs in China
    Chan, K; Wang, J; Wei, KC
  • Income smoothing and underperformance in initial public offerings
    Chane, PK; Lewis, CM

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