Corporate Window-Dressing: A Study of Earnings Management Across Ownership Groups in European IPOs

Sammanfattning: This paper studies earnings management in European IPOs and examines how it differs by three groups of issuers: private equity-backed, venture capital-backed, and non-sponsored. Using a sample of 2,126 IPOs between 1995 and 2015, we find compelling evidence of earnings management around the time of issuance. Moreover, we find significant differences in the magnitude and frequency of earnings management across ownership group, with nonsponsored firms exhibiting higher levels than private equity- and venture capital-backed issuers. The differences between ownership groups persist and are statistically significant after controlling for size, book-to-market, and industry-fixed effects. Finally, we validate our proxy for earnings management by comparing the 36-month performance of "aggressive" earnings managers with that of "conservative" earnings managers. Our results indicate that the quartile of aggressive earnings managers performs 28.6 percent worse in market-adjusted returns than the conservative quartile.