The Implications of Earnings Management in Initial Public Offerings - Evidence from the Nordic Stock Markets

Sammanfattning: This paper evaluates how earnings management in initial public offerings (IPOs) affects long-term stock performance of Nordic firms, focusing on the role of current accruals. We provide evidence that current accruals above the industry standard reliably predict future stock underperformance given a 36-month time period. Issuers with the highest level of discretionary current accruals (DCA) underperform IPO firms with the lowest level of DCA by 30% on average. Additionally, we observe an almost complete reversal of abnormal accruals in the year after the IPO. This reversal is accompanied by a decline in net income for the high-DCA firms, suggesting that managers opportunistically manage earnings in the IPO year.