Abstract
Research background: An initial public offering (IPO) creates an excellent opportunity to research the impact of changes in the institutional environment of companies on the trustworthiness of the information disclosed in financial statements.
 Purpose of the article: The main aim of the study is to analyze the use of accrual and real earnings management to inflate earnings, revenue, or total assets around the going public event. Therefore, this paper contributes to the stream of study on the quality of financial reporting of new stock companies.
 Methods: Two main approaches reflect the use of various types of earnings management activities, i.e., discretionary accruals and real earnings management. In both cases, it was necessary to use proper OLS method estimated models to identify the normal level of categories that affect the results reported in financial statements.
 Findings & value added: Based on a sample of 183 IPOs from the Warsaw Stock Exchange between 2005 and 2015, generally, managers of newly-listed companies actively use discretionary accruals, reduce production costs and certain discretionary expenses, and abnormal cash flows from operations ? i.e., all proxies of earnings management used in the paper ? in the periods around the IPO. In the period prior to the IPO, managers more often introduce techniques typical of the real sphere of the company's operations, in particular, the deliberate modeling of certain discretionary costs. In turn, the use of discretionary accruals dominates in the year after the IPO.
Highlights
When transforming from private to public ownership, an initial public offering (IPO) allows for in-depth research on both the impact of institutional changes on the quality of reported financial results and the decisional utility of financial statements to potential investors
The only two exceptions are the mean values of the coefficients for the changes in sales (ΔSALES) in the production cost model (PROD) and the operational cash flow (CFO) in the total accruals model (TACC) for the year prior to the IPO
The highest average value is reported for both models that refer to production costs, and these results are quite similar to those presented by Roychowdhury (2006)
Summary
When transforming from private to public ownership, an initial public offering (IPO) allows for in-depth research on both the impact of institutional changes on the quality of reported financial results and the decisional utility of financial statements to potential investors. There is an intensive discussion in the literature on the use of earnings management in IPOs, and the conclusions of the current research seem to question the previous findings. Initial studies suggest that managers intensively manipulate reported financial results to obtain a higher valuation of shares in the first public sale 27–49), taking advantage of the information asymmetry present in the IPO They make an unjustified transfer of wealth between particular groups of shareholders, namely, from new stock market players to the original owners of the companies By contrast, Roosenboom et al (2003, pp. 243–266), Venkataraman et al (2008, pp. 1315–1345), and Ball and Shivakumar (2008, pp. 324–349) point out that going public companies tend to use conservative rather than aggressive pre-IPO financial reporting, anticipating the high adverse costs and negative market consequences
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
