Do Indonesian Firms Inflate Their Reported Earnings Prior to IPOs?

Abstract

This study attempts to provide evidence on earnings management of Indonesian firms one year prior to going public. The focus of this study is abnormal portion of accruals. These accruals are estimated using methodologies proposed by Dechow et al. (1995), and Kothari et al. (2005). This study finds no evidence that, on average, Indonesian firms manipulate their reported earnings to obtain higher proceeds from their IPOs. The findings stand even after size and leverage levels are considered in evaluating the incidences of earnings managements prior to IPOs. These findings support the arguments of Watts (2003) that empirical evidences show that public firms utilize conservative accounting and the practice becomes more conservative lately. It is also in line with Ball and Shivakumar’s argument (2005 and 2006) that the demand, for higher quality financial reports from public investors, forces IPO firms to improve their reporting quality prior to IPO and that regulation of publicly‐listed companies imposes greater requirements than non‐listed companies.