Credit Ratings and Earnings Management around IPOs

Research output: Contribution to journalArticle

  • 2 Citations

Abstract

This study examines the impact of having a credit rating on earnings management (EM) through accruals and real activities manipulation by initial public offering (IPO) firms. We find that firms going public with a credit rating are less likely to engage in income-enhancing accrual-based and real EM in the offering year. The monitoring by a credit rating agency (CRA) and the reduced information asymmetry due to the provision of a credit rating disincentivise rated issuers from managing earnings. We also suggest that the participation of a reputable auditing firm is crucial for CRAs to effectively restrain EM. Moreover, we document that for unrated issuers, at-issue income-increasing EM is not linked to future earnings and is negatively related to post-issue long-run stock performance. However, for rated issuers, at-issue income-increasing EM is positively associated with subsequent accounting performance and is unrelated to long-run stock performance following the offering. The evidence indicates that managers in unrated firms generally manipulate earnings to mislead investors, while managers in rated firms tend to exercise their accounting and operating discretion for informative purposes.
LanguageEnglish
Pages154 - 195
Number of pages42
JournalJournal of Business Finance and Accounting
Volume44
Issue number1-2
Early online date8 Dec 2016
DOIs
StatusPublished - 20 Feb 2017

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Credit rating
Earnings management
Income
Managers
Stock performance
Initial public offerings
Information asymmetry
Credit rating agencies
Monitoring
Investors
Going public
Discretion
Exercise
Auditing
Participation
Accounting performance
Real activity
Manipulation
Accruals

Cite this

Credit Ratings and Earnings Management around IPOs. / Gounopoulos, Dimitrios; Pham, Hang.

In: Journal of Business Finance and Accounting, Vol. 44, No. 1-2, 20.02.2017, p. 154 - 195.

Research output: Contribution to journalArticle

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