Do IPO Firms Misclassify Expenses? Implications for IPO Price Formation and Post-IPO Stock Performance

64 Pages Posted: 11 May 2020 Last revised: 23 Jul 2020

See all articles by Xiaotao Kelvin Liu

Xiaotao Kelvin Liu

DMSB - Accounting

Biyu Wu

University of Nebraska-Lincoln

Date Written: January 24, 2020

Abstract

This study investigates whether IPO firms inflate “core” earnings through classification shifting (i.e., misclassifying core expenses as income-decreasing special items) immediately prior to IPOs. We provide initial evidence that IPO firms engage in classification shifting in the pre-IPO period. Using hand-collect price and share information from IPO prospectuses, we find that pre-IPO classification shifting is positively associated with the price revision from the mid-point of the initial price range to the final offer price, suggesting that pre-IPO classification shifting influences IPO price formation. Furthermore, we find that pre-IPO classification shifting is negatively associated with post-IPO stock returns. Overall, our findings caution investors, auditors, and regulators that classification shifting, a seemingly innocuous accounting maneuver, can mislead investors in their IPO valuation and is associated with post-IPO underperformance.

Keywords: initial public offerings, classification shifting, price formation, post-IPO performance

JEL Classification: M40, M41

Suggested Citation

Liu, Xiaotao Kelvin and Wu, Biyu, Do IPO Firms Misclassify Expenses? Implications for IPO Price Formation and Post-IPO Stock Performance (January 24, 2020). Management Science, Forthcoming, Northeastern U. D’Amore-McKim School of Business Research Paper No. 3573564, Available at SSRN: https://ssrn.com/abstract=3573564

Xiaotao Kelvin Liu (Contact Author)

DMSB - Accounting ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

Biyu Wu

University of Nebraska-Lincoln ( email )

730 N. 14th Street
Lincoln, NE 68588
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
197
Abstract Views
939
Rank
278,639
PlumX Metrics