Earnings management and the long-run market performance of initial public offerings

Issuers of initial public offerings ~IPOs! can report earnings in excess of cash f lows by taking positive accruals. This paper provides evidence that issuers with unusu-ally high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive ” quartile of earnings managers have a three-year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative ” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications. SEVERAL STUDIES FIND THAT INITIAL public offerings ~IPOs! underperform after the issue.1 Over a three-year holding period after the offering, Ritter ~1991