Earnings management, IPO screening and resource allocation efficiency

Abstract

Employing IPO firms from 2006 to 2012 as the sample and taking the perspective of earnings management, this paper examines the decision efficiency of the Stock Issue Examination and Verification Committee (SIEVC) in China. We find that the rate of passing IPO screening is negatively correlated with firms’ earnings management, but this relationship is only found for the high-level earnings management. Further analyses show that when IPO firms are state-owned enterprises (SOEs) or receive industry support from government, their IPO applications are less likely to be rejected for earnings management. Meanwhile, political connection and business complexity weaken the negative relationship between the rate of passing the IPO screening and firms’ earnings management. Finally, we find that IPO firms with more earnings management have lower stock returns and worse accounting performance after listing.