Can corporate governance discipline opportunistic earnings management during IPO process?

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.