7 - Earnings management and the long-run performance of Spanish initial public offerings

Abstract

This chapter analyzes the long-run effect of the IPO decision in Spain. Similar to most international evidence, results show that offering companies experience negative abnormal returns in periods of up to 3 years after the public offering. It argues that this underperformance could be due to a gradual correction of an initial overvaluation induced by earnings management practices. It examines whether IPO firms manipulate earnings in order to influence market perceptions of the firm's value around the offering, and explores whether discretionary accruals are used to boost reported earnings around the offering. The study finds unusually high performance-matched abnormal accruals in the IPO year and a gradual decline thereafter. It also finds that IPO terciles with higher discretionary accruals have poorer stock return performance in subsequent years. A regression analysis is carried out to explore the relation between post-IPO abnormal returns and previous earnings management which indicate that abnormal accruals around the offering are negatively related to adjusted returns in the subsequent years. Thus, the findings of this study suggest that opportunistic earnings management explains, at least partially, the IPO anomaly in Spain.