Earnings Management and Delisting Risk of Initial Public Offerings

56 Pages Posted: 2 Oct 2005 Last revised: 17 Apr 2023

See all articles by Jinliang Li

Jinliang Li

Tsinghua University

Jian Zhou

University of Hawaii at Manoa

Date Written: March 1, 2006

Abstract

Earnings management is a corporate decision subject to costs. Both earnings management in the IPO process and the ex ante delisting risk of newly issued firms are related to firm fundamentals. With a sample of IPOs from 1980 to 1999, we find that the degree of earnings management possesses significant predictive power on IPO failure. IPO firms associated with aggressive earnings management are more likely to delist for performance failure, and tend to delist sooner. Furthermore, we find that IPO firms associated with conservative earnings management are more likely to be merged or acquired and they earn positive abnormal returns. Our results also show that IPO issuers manage earnings in response to market demand. Market-wide earnings management of IPO firms interacts with the IPO cycle documented by Lowry and Schwert (2002).

Keywords: Earnings management, delisting rate, life expectancy, IPOs

JEL Classification: G24, G32, M41, M43

Suggested Citation

Li, Jinliang and Zhou, Jian, Earnings Management and Delisting Risk of Initial Public Offerings (March 1, 2006). Simon School, University of Rochester, Research Paper Series, AAA 2008 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=641021 or http://dx.doi.org/10.2139/ssrn.641021

Jinliang Li

Tsinghua University ( email )

1 Tsinghua Yuan
Beijing, 100084
China

Jian Zhou (Contact Author)

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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