The Long-Run Underperformance of Post-Listing Stock Returns: The Evidence of Earnings Management

Abstract

This paper explores the puzzle of underperformance during post-listing period by investigating whether managers manipulate earnings before their stocks switch from the NASDAQ to the NYSE and the AMEX, and from the AMEX to the NYSE during the period 1990-1997. Evidence indicates that managers manipulate earnings during the year prior to having their stocks switch to new trading locations. I find a negative relationship between pre-listing discretionary current accruals and subsequent earnings changes and stock returns. Such negative relationship is specially pronounced for small-and-aggressive firms than large-and-conserve firms. The negative relationship remains even after controlling the potential bias for high-performance firms and is common to all switching firms, especially for those switching to the NYSE.