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bandu2 : menu_arrow.gif Article: Section examines changes over time in Reebok outlet discretionary reporting - 13/11/2011 12:36


 in the annual earnings one and two years after the IPO as a measure of the Reebok Zigfuel relevance of accounting data to investors. For the assetsinplace firms. find that investors price both nondiscretionarv and discretionary accounting items in both periods as evidence of investors fixation on reported earnings. I also find a strong decline over time in the relevance of accounting data in the years Cheap Reebok Zigtech following the IPO. This might suggest that the reduced association between longterm stock returns and discretionary accruals is not necessarily due to greater investor awareness. While I find reduced rclcvancc of accounting data for the technologybased firms as well, I also find that the discretionary items are mostly not associated with the market value of IPO firms in the later period, which suggests that investors in those firms become increasingly aware ofthe practice of discretionary reporting. manipulation imposes very low costs on those firms and therefore does not cause them to reduce the amount of data manipulation Even though I use alternative tests to support my results. I cannot rule out the possibility that the Reebok easytone shoes models I use arc inappropriate for young, rapidly growing IPO firms who receive large injections of cash and that what my models capture as abnormal components are in fact aggressive investments in inventories, accounts receivable, Reebok Zigtech and RD, as argued by Ball and Shivakumar. If indeed the abnormal levels are overinvestments driven by large inflows of cash, then one should expect positive correlations between the proceeds raised and the abnormal components, but fail to find such a relationships untabulatcd. Yet even if the claim by Ball and Shivakumar is correct. still observe investor misinterpretation and overpricing of those activities In addition, in some years of my study, the stock market experienced extreme cyclical behavior, and although I control for it in the tests, cannot rule out the possibility that my results are driven by measurement errors. This unique research design which examines manipulation of different accounting items by distinct groups of Discount Reebok Shoes firms and their association with longterm stock returns, generates more powerful tests and sheds more light on the reporting practices of firms around the time that they go public I demonstrate that the use of these betterspecified tests is essential for research on discretionary reporting by IPO firms; a more general model that only examines discretionary accruals by the entire sample venerates much Reebok High Top Women Reebok Shoes assetsinplace group should motivate further research on the determinants of investor learning. The remainder of this paper is organized as follows. In section, I review the literature on earnings management by IPO firms, discuss the partitioning of the IPO sample into subgroups and develop testable hypotheses. Section describes the sample data, and section reports the results. Section examines changes over time in Reebok outlet discretionary reporting, in the relevance of accounting data, and in investor awareness. Section concludes. Tcoh, Wclch and Wong IA and Tcoh, Wclch and Rao show that IPO firms use the flexibility allowed within GAAP to bias their reported earnings upward.

bandu2 : menu_arrow.gif Article: there are crosssectional differences Cheap Reebok Zigtech in discretionary - 13/11/2011 12:39


The authors show that investors fail to identify the Reebok easytone shoes earnings inflation and overprice these firms In later periods, as the effect ofthe earnings management reverses and those firms report a decline in earnings, investors adjust their expectations downward and cause the stock price to drop. DuCharmc et al. show that reported earnings in both the last annual statements before the issue and the first annual statements following the issue are inflated A later study by Fan fails to find an association between discretionary accruals and longterm stock returns She suggests that earnings Discount Reebok Shoes management is done for signaling reasons by highquality firms in order to separate themselves from lowquality firms using costly earnings management actions. A recent paper by Ball and Shivakumar rules mandate the expensing of investment in RD, and because the length of time from the stan ofthe development of a new drug until its approval is long, those firms tend to report very small sales and heavy accounting losses for long periods before turning profitable. At the time of going public, only one in seven such finns is profitable. Other characteristics of these linns Reebok Zigtech are that they are usually backed by venture capitalists VCs and funded mostly with equity. The second group consists of highgrowth technology firms from industries such as computers, electronics, and communications. Firms in this group enjoy rapid growth through investment in technology, although thev invest in RD is less than sciencebascd firms. By the time of their IPO. more than of these firms arc already profitable. The third group consists of companies in traditional industries that are considered old economy firms. Finns in this group are more commercially established than firms in the other groups and on average have the highest level of sales. Reebok Zigfuel Noncash assets make up more than of their assets, and their average age is the highest. Although these firms still enjoy rapid growth, it is at lower rates than that cxpcricnccd by the other groups. These companies arc also characterized by both debt and equity funding. The fourth group consists of Internet firms. These firms are somewhat similar to the technologybased firms; however, Reebok outlet they are younger, they grow faster, and they inv est less in technology. Internet firms are also characterized by VC backing and very high investor valuations Because they go public at a very young age mean and median of. and years respectively, those firms are rarely profitable only in. My first set of hypotheses is about the use of accounting discretion around the IPO hypothesize that there are crosssectional differences Cheap Reebok Zigtech in discretionary reponing. Since most firms in the Reebok High Top Women Reebok Shoes technologybased and assetsinplace groups are already profitable at the time they go public. and. respectively, I expect investors to focus on those firms profitability and, as a result. I expect to find a high level of earnings management As firms in the sciencebased and Internet groups are overwhelmingly unprofitable only. and. respectively, are profitable, and given the findings in prior literature Hayn, Bartov.

bandu2 : menu_arrow.gif Article: firms albeit much lower Reebok outlet than for sciencebased firms - 13/11/2011 12:42


 Mohanran and Secthamraju that investors give less weight to negative earnings, Reebok easytone shoes do not cxpcct those firms to focus on reducing their losses through earnings management. Additional findings by Hayn, Joos, Chan, Lakonishok and Sougiannis, and Penman and Zhang that conservative RD expensing rules distort accounting profitability measures, support this prediction for the sciencebased firms. I state my first hypothesis in an alternative form, as follows: earnings forecasts but miss their revenue forecasts suffer significant negative Reebok Zigfuel abnormal returns in the earnings announcement period, while value firms that meet analysts earnings forecasts enjoy significant positive abnormal returns regardless of whether their sales met the analysts forecasts. Since IPO firms arc usually in a growth phase average annual growth of. on a value weight basis. I expect to find strong evidence of sales management, but expect the magnitude to vary across the groups. Discount Reebok Shoes Fastgrowing, unprofitable Internet firms have a strong incentive to manage sales. Technology based firms also grow very fast, albeit more slowly than Internet firms, and therefore hypothesize that these groups will aggressively manage their sales. For the assetsinplace group I expect a lower degree of sales manipulation, as this group has the lowest rates of growth, it is hard to predict whether sciencebased firms manipulate sales. On the one hand, firms in this group enjoy healthy rales of growth; however in absolute tenns, sales are very small median sales of a mere S.M, as they have only a few products in the commercial stage. Moreover, Guo, Lev and Zhou suggest that other variables, such as the average development stage of pipeline products, the percentage Reebok Zigtech of products with patents, and the percentage of products developed through alliances with other firms, are of much greater importance to investors My hypothesis regarding sales management is summarized below: HIh: Internet and technologybased firms manage sales significantly more than driven by the negative relationship between RD spending and earnings and by the belief that rational managers spend on RD only when they expect Reebok High Top Women Reebok Shoes to benefit from such investment. Taken together, this provides an incentive for sciencebased firms to manage their RD expenses. Since RD expenses arc also high for technologybased firms and Internet firms albeit much lower Reebok outlet than for sciencebased firms. expect those linns also to manage RD expenses upward; however, the negative effect on earnings of such manipulation might weaken the incentive for profitable technologybased firms RD expenditures are negligible for assetsinplace firms nonexistent for most of them; hence. I do not expect firms in this group to manage RD expenses. state the hypothesis about RD management Cheap Reebok Zigtech in an alternative form below: HIc: Sciencebased firms manage RD upward significantly more than the other groups, and assetsinplace firms do not manage RD upward. II c: Sciencebased firms manage RD upw ard significantly more than the other groups, and assetsinplace firms do not manage RD upward.

bandu2 : menu_arrow.gif Article: underwriters reputation rankings are also obtained Reebok Zigfuel from Ritt - 13/11/2011 12:44


Strong incentive to manage RD expense, combined with relatively weak motivation to manage sales, might lead sciencebased firms to indirectly manage earnings downward. I do not anticipate Reebok outlet the same for Internet firms. Although they might not be motivated to report higher earnings, the strong incentive to manage sales might cause them to indirectly increase reported earnings, which will offset the negative effect of RD manipulation. Since it is costly to manipulate accounting data, rational managers should practice discretionary reporting only when it can benefit them. My second set of hypotheses is that the managed variables are valued by investors when pricing IPO securities as follows: Next I examine whether investors are able to recognize Reebok easytone shoes discretionary financial reporting. If investors arc unable lo recognize and separate the discrctionaiy components from the reported amounts of items they price, they will ov ervalue the security at the time of the issue, but later, as the inability of the firm to sustain the inflated amounts is revealed, the security price will drop If this is the case, there should be a negative association between the magnitude of discretionary reporting applied to accounting items and the longterm stock price Conversely, if investors are able to identify the discretionary reporting, they would not be Discount Reebok Shoes surprised by a reversal ofthe inflated item, and an association would not be found. I formalize this hypothesis in an alternative form: : Themagnitude of discretionary financial reporting is associated with post issue abnormal stock returns. Figure I summarizes the discretionary reporting expectations. My sample period starts in as statements of cash flow measures become available Reebok Zigtech following the release of SFAS; use these statements because Collins and Iliibar point out that the measurement of total accruals from the balance sheet BS is biased because of nonarticulation problems. The sample period ends in because I test the association between the discretionary items and longterm stock returns. The list of IPO firms studied is obtained from Jay Hitter’s website Data on stock returns are from CRSP. and financial accounting data arc from Standard Poor’s Compustat Reporting dates arc from lBES, and information about founding dates and underwriters reputation rankings are also obtained Reebok Zigfuel from Rittcr’s website. Information on underwriters, VCs, offer price, and market capitalization following the issue are from the Securities Data Corporation Global New Issues Database by Thompson Financial. For the period I calculate ownership retention and market capitalization based on data manually collected by Alexander I.jungqvist I.junquvist and Wilhelm To be included in the sample, an IPO must have an offer price of at least SI and a market capitalization of at least M immediately after the issue. Unit offerings, Real Estate Investment Reebok High Top Women Reebok Shoes Trust REIT offerings, American Depository Receipts ADRs, and closedend funds Cheap Reebok Zigtech are excluded from the sample Firms in regulated industries SIC and financial institutions SIC are also omitted.