The Persistence of Earnings and Corporate Governance in IPO Firms

In this study, we investigate the earnings persistence in IPO firms by examining the two components of earnings: accruals and cash flows. We also analyze the impact of corporate governance on earnings and the two earnings components. In our comparison of the top and bottom quartiles based on the firms\u27 earnings at the IPO year, we find that although the top quartile firms have a significantly positive accrual component in the IPO year, they eventually have the same negative accrual component of earnings as the bottom quartile firms in the second year after the IPO. In contrast, we find that the significant difference in the cash flow component between the top and bottom quartiles persists during the two years after the IPO. This finding supports the existing literature that the cash flow component contributes to the persistence of earnings while the accrual component does not. We also find that the corporate governance structure has a significant impact on earnings and the components of earnings for the top quartile firms, but not for the bottom quartile firms. This is particularly evident since the top quartile firms have the opportunity to manage their earnings, while firms in the lowest quartile are unable to manage their earnings