When are IPO Firms' Income-Increasing Accruals Informative?*

Abstract

This paper investigates whether some initial public offering (IPO) managers report informative (as opposed to opportunistic) income-increasing accruals and the extent to which market participants differentially price informative accruals. I find significantly more persistent income-increasing accruals and non-correlation with future restatements when the firm is underwritten by a more reputable investment bank, and the converse (less persistence and more restatements) when firms employ less reputable investment banks. The market however, does not appear to be fooled; IPO security prices only increase in "informative" accruals. Furthermore, IPO accruals are unrelated to subsequent abnormal returns, consistent with appropriate pricing at the IPO.

Keywords: initial public offering, earnings management, restatement, earnings quality, investment banking

JEL Classification: G14, G24, M41, M43