Role Of Underwriters In Restraining Earnings Management In Initial Public Offerings

We investigate the relationship between underwriter reputation and earnings management of IPO firms over the period of 1991-2005. We find that IPO firms engage in less earnings management if they are underwritten by prestigious investment bankers. Furthermore, the role of prestigious underwriters in restraining earnings management of IPO issuers do not change during the Internet Bubble period or after the passage of the Sarbanes-Oxley Act (SOX). The findings support the certification role of underwriters in the IPO process. We also document that firms going public in the post-SOX period engage in less earnings management compared to firms going public in the pre-SOX period. Further findings suggest that the changing objectives of venture capitalists may explain the reduction in the level of earnings management of IPO firms following the passage of SOX.

Download Full-text

Do Venture Capitalists Influence the Decision to Manage Earnings in Initial Public Offerings?

The Accounting Review ◽

10.2308/accr.2006.81.5.1119 ◽

2006 ◽

Vol 81 (5) ◽

pp. 1119-1150 ◽

Cited By ~ 120

Author(s):

Suzanne G. Morsfield ◽

Christine E. L. Tan

Keyword(s):

Earnings Management ◽

Initial Public Offerings ◽

The Internet ◽

Venture Capitalists ◽

Public Offerings ◽

Abnormal Accruals

Prior studies suggest that venture capitalists (VCs) play a monitoring role. We predict and find that IPO-year abnormal accruals are lower in the presence of VCs for a sample of 2,630 IPO firms during 1983–2001. Our findings are robust to controls for the endogenous choice of VC financing. We consistently find that the VC effect holds even when controlling for IPO lock-up provisions, VC partial cashing out subsequent to the IPO, and alternative proxies for earnings management. In addition, our findings do not support the claims of critics that VCs inflated earnings during the Internet IPO bubble. Finally, we provide some evidence that the lower earnings management associated with VC monitoring partially explains the superior post-IPO returns of VC-backed firms.

Download Full-text

Long-Term Performance of Initial Public Offerings: Venture Capitalists and Reputation of Investment Bankers

SSRN Electronic Journal ◽

10.2139/ssrn.239421 ◽

2000 ◽

Cited By ~ 2

Author(s):

John A. Doukas ◽

Halit Gonenc

Keyword(s):

Initial Public Offerings ◽

Venture Capitalists ◽

Public Offerings ◽

Investment Bankers ◽

Long Term Performance ◽

Term Performance

Download Full-text

The Role of the Media in the Internet IPO Bubble

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109009990056 ◽

2009 ◽

Vol 44 (3) ◽

pp. 657-682 ◽

Cited By ~ 102

Author(s):

Utpal Bhattacharya ◽

Neal Galpin ◽

Rina Ray ◽

Xiaoyun Yu

Keyword(s):

Initial Public Offerings ◽

Good News ◽

News Item ◽

The Internet ◽

Public Offerings ◽

Share Prices ◽

Dramatic Rise ◽

The Media ◽

Media Hype

AbstractWe read all news items that came out between 1996 and 2000 on 458 Internet initial public offerings (IPOs) and a matching sample of 458 non-Internet IPOs (a total of 171,488 news items) and classify each news item as good news, neutral news, or bad news. We first document that the media were more positive for Internet IPOs in the period of the dramatic rise in share prices and more negative for Internet IPOs in the period of the dramatic fall in share prices. We then document that media hype is unable to explain the Internet bubble: A 1,646% difference exists in returns between Internet stocks and non-Internet stocks from January 1, 1997, through March 24, 2000 (the market peak), and the media can explain only 2.9% of that.

Download Full-text

INITIAL PUBLIC OFFERINGS AND PRE-IPO SHAREHOLDERS: ANGELS VERSUS VENTURE CAPITALISTS

Journal of Developmental Entrepreneurship ◽

10.1142/s1084946712500227 ◽

2012 ◽

Vol 17 (04) ◽

pp. 1250022 ◽

Cited By ~ 4

Author(s):

WILLIAM C. JOHNSON ◽

JEFFREY E. SOHL

Keyword(s):

Initial Public Offerings ◽

Initial Public Offering ◽

Early Stage ◽

Equity Capital ◽

Venture Capitalists ◽

Public Offerings ◽

Corporate Investors ◽

Public Offering ◽

Angel Investors

At the time of an initial public offering, shares in a firm are typically held by venture capitalists, insiders, corporate investors and angel investors. We examine the role of angel investors in the IPO process. We find that angel investors provide equity capital in industries venture capitalists are less likely to serve and that shareholders in angel backed IPO firms are more likely to sell their shares at the time of the offering. Where venture capital backed IPO firms have higher underpricing, angel backed IPO firms do not, implying that angels may be the preferred investors for early-stage firms.

Download Full-text

Asymmetric Information in the Market for IPOs

International Journal of Finance & Banking Studies (2147-4486) ◽

10.20525/ijfbs.v7i3.114 ◽

2019 ◽

Vol 7 (3) ◽

pp. 01-19

Author(s):

Heather N Rhodes

Keyword(s):

Asymmetric Information ◽

Moral Hazard ◽

Initial Public Offerings ◽

Wealth Effect ◽

Matched Sample ◽

Going Public ◽

Public Offerings ◽

Sarbanes Oxley ◽

The Difference ◽

Selection Of

This study utilizes hand-collected ownership data to re-examine the signaling, agency and wealth effect theories in a matched-sample of initial public offerings (IPOs) issued in the U.S. prior to and following the passage of the Sarbanes-Oxley Act of 2002 (SOX). SOX provides some motivation for revisiting these topics because evidence exists that it may have affected the types of firms going public and ultimately the relatively importance of adverse selection and moral hazard, the asymmetric information problems with which these theories are concerned. Results on both the pre- and post-SOX samples are consistent with the signaling theory and evidence of a wealth effect exists in both eras. However, in contrast to results of studies conducted prior to SOX, both the pre- and post-SOX results give little credence to the agency theory, suggesting that SOX has not impacted investors’ concerns regarding moral hazard. Rather, the difference between the pre-SOX results and the results of previous studies suggests that SOX appeared to reduce moral hazard concerns only through its effect on the self-selection of firms going public.

Download Full-text

Performance of VC/PE-backed IPOs: New Insights from India

Global Business Review ◽

10.1177/0972150920950543 ◽

2020 ◽

pp. 097215092095054

Author(s):

Soumya G. Deb ◽

Pradip Banerjee

Keyword(s):

Initial Public Offerings ◽

Private Equity ◽

Operating Performance ◽

Equity Market ◽

Venture Capitalists ◽

Public Offerings ◽

Market Perception ◽

Using Data

This article explores long-term equity and operating performance of Indian firms issuing initial public offerings (IPOs) backed by venture capital/private equity (VC/PE) funding. Using data for 173 IPOs backed by VC/PE funding during 2000–2016, the article shows that equity market performance of VC/PE-backed IPOs is unimpressive post issue, compared to their peers. This is not only due to market perception but also associated with a declining operating performance. However, information asymmetry, mispricing and ‘timing the market’ by issuing firms do not seem to be the reasons for such long-term underperformance. We argue that it may be a case of too much money chasing too few winners for Indian IPOs and individual rent-seeking activities by managers. The observation raises the question of effectiveness of the monitoring role of venture capitalists or PE funders post the IPO in an Indian context. This is substantiated by our additional finding that sustained monitoring and hand-holding by venture capitalists and PE funders post the IPO cause an improvement in performance. The findings of this study can have significant implications for all stakeholders, particularly common investors in the Indian equity market.

Download Full-text

Is Window-Dressing around Going Public Beneficial? Evidence from Poland

Journal of Risk and Financial Management ◽

10.3390/jrfm12010018 ◽

2019 ◽

Vol 12 (1) ◽

pp. 18 ◽

Cited By ~ 1

Author(s):

Joanna Lizińska ◽

Leszek Czapiewski

Keyword(s):

Earnings Management ◽

Stock Returns ◽

Initial Public Offerings ◽

Going Public ◽

Financial Reports ◽

Public Offerings ◽

Ipo Performance ◽

Company Value ◽

The Difference

The informativeness of financial reports has been of a great importance to both investors and academics. Earnings are crucial for evaluating future prospects and determining company value, especially around milestone events such as initial public offerings (IPO). If investors are misled by manipulated earnings, they could pay too high a price and suffer losses in the long-term when prices adjust to real value. We provide new evidence on the relationship between earnings management and the long-term performance of IPOs as we test the issue with a methodology that has not been applied so far for issues in Poland. We use a set of proxies of earnings management and test the long-term IPO performance under several factor models (CAPM, and three extensions of the Fama-French model). Aggressive IPOs perform very poorly later and earn severe negative stock returns up to three years after going public. The difference in returns in accrual quantiles is statistically significant in almost half of methodology settings. The results seem to suggest that investors might not be able to discount pre-IPO abnormal accruals and could be overoptimistic. Once the true earnings performance is revealed over time, the market makes downward price corrections.

Download Full-text