Abstract
This study examines whether Initial Public Offering (IPO) firms in Jordan utilize real activities and accruals accounting during the offering year to manipulate income. To date the current study is the first to examine real activities and accrual earnings management that undertaken by IPO firms in Jordan. Using a Jordanian sample of 41 IPO firms over the period between 2000 and 2011, this study provides new evidence to the literature that IPO firms in Jordan utilize real activities and accruals accounting to inflate net income that is reported during the offering year. In particular, the findings of current study show that IPO firms report a higher level of earnings manipulation during the offering year that conducted via accrual-based earnings management, sales-based, discretionary expenses-based, and the aggregated measure-based of real activities.
Highlights
The Initial Public Offering (IPO) is considered as a very important change in the firm’s life cycle where the firm is switched from being a private to a public firm by selling its shares for the first time to the public
This study examines whether Initial Public Offering (IPO) firms in Jordan utilize real activities and accruals accounting during the offering year to manipulate income
This evidence is consistent with the main hypothesis of this study that IPO firms in Jordan report a higher level of accrual earnings management during the offering year
Summary
The Initial Public Offering (IPO) is considered as a very important change in the firm’s life cycle where the firm is switched from being a private to a public firm by selling its shares for the first time to the public (interested investors). The investment banks (underwriters) play a significant role by helping the IPO firm to set the offering price and the number of shares to be offered to the public. Interested investors in their turn take into their consideration many factors before investing in an IPO e.g. previous earnings record, disclosure quality, information asymmetry, risk profile, quality of audit firm, etc. Given the importance of income records around IPOs, prior studies have examined the financial reporting quality around the offering year and found IPO firms manipulate income before, during, and after the offering year (e.g., Teoh et al, 1998; Gramlich and Sorensen, 2004; Wongsunwai, 2013; Alhadab, 2015). This research has pointed that a higher level of information asymmetry between IPO firms’ management and potential investors provides managers with more flexibility to manipulate income using different techniques e.g. accrual earnings management, real activities, classification shifting (Teoh et al, 1998;Alhadab et al 2016)
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