Earnings management and listing day performance of IPOs in India

Abstract

PurposeThe purpose of this study is to examine the influence of earnings management during initial public offerings on the listing day returns.Design/methodology/approachThe study collected data for 511 Indian IPOs that came between April 2003 and March 2019 for calculating earnings management. On the basis of the Cross Sectional Modified Jones Model 1995, the paper presents three proxies of earnings management as discretionary accruals (DA), discretionary current accruals (DCA) and discretionary long-term accruals (DLA). The study further used correlation and multiple regression analysis to assess the impact of earnings management on listing day returns.FindingsThe findings show that earnings management and listing day returns vary through issue-year and industry-type. Apart from it, the study reveals a greater contribution of short-term accruals in earnings management on the basis of higher DCA values. It also discloses that the aggregate level of earnings management (DA) influences listing returns, whereas DCA and DLA separately have no impact on the listing day returns of the Indian IPOs.Research limitations/implicationsThe findings are useful to potential investors and analysts to observe, assess and understand the quality of financial reports that are based on fallacious disclosure of accounting figures. The study also reflects the efficacy of Indian regulatory norms for IPOs in constraining earnings management and underpricing, thus providing meaningful insight to the policy makers and the regulators.Originality/valueThis study is distinguished by its focus on determining the influence of earnings management on listing day returns in Indian IPOs by using three earnings management proxies.