Opportunism and the Related Consequences in the IPO Setting

Abstract

Despite the presence of a number of studies that examine financial reporting at the IPO, a link between opportunism and post-IPO penalties (including litigation) remains undocumented. The absence of this link may stem from noise introduced by relaxed legal requirements (along with other unique features) in the IPO setting or, alternatively, it might relate to methodological issues that make detecting a link difficult. Yet, evidence of this link is important, as it indicates the presence of ex ante incentives to report conservatively. Accordingly, this paper studies the occurrence of opportunism at the IPO and tests its connection to consequences. In contrast to recent research documenting IPO firms’ conservative reporting (relative to their own reporting as private firms), we find no evidence to suggest that the average IPO firm reports more conservatively than similar public firms. These findings leave a role for post-IPO settling up mechanisms when abnormal accruals reflect opportunistic misreporting. Consistent with the notion that ex post settling-up mechanisms play an important role in the IPO setting, we document a connection between IPO opportunism and subsequent penalties for the firm and, to a limited extent, its managers. Further analysis indicates that in the presence of increased incentives to manipulate, this relation strengthens. At the same time, we also find evidence that reporting discretion that more likely reflects private information (as opposed to opportunism) is less likely to trigger penalties.