Mathematical evaluation model of the relationship between earnings and under-pricing in the long-term through big data analysis and calculation

Abstract

Investors’ performance was always mislead by Initial public offering (IPO) firms by using earnings management, so that the shares are overvalued in the market where they belong public. But over a long period, the genuine firm value prevails. As the earnings usually be exaggerated just before IPO, specially for non-government-owned companies, Share offer price changes as a result, the investor’s interest may be influenced. Thus, in this paper, we took a listed companies in China as the research objects, extracting their financial data of the last three years before IPO, leveraging the unique detailed bid data of institutional investors during the whole IPO process, compares the influence of earnings management on them before and after IPO in the long term. We set the bid price and earnings management as the key variables; quantify earnings management through important financial information, using the regression model and try to contribute the linear relationship; analyzing the accrual-based earnings management and the real earnings management to see earnings management’s influence and relationship with IPO offer price. The hypothesis is that earnings management in Chinese IPO companies is negatively associated with IPO underpricing.