Earnings Management in Initial Public Offerings

Initial public offerings (IPOs) represent a pivotal stage in a company’s lifecycle, ushering in new sources of capital alongside heightened regulatory and market scrutiny. Earnings management in this context encompasses strategic adjustments to accounting estimates or real activities to influence reported performance around the offering date. Such practices may involve accrual-based techniques—shifting revenues or expenses between periods—or real earnings management, whereby firms time production, discretionary expenditures and sales incentives to affect earnings levels. Motivations include meeting underwriting benchmarks, reducing perceived risk, signalling quality to prospective investors and complying with listing requirements. However, these actions can undermine the transparency of financial reports, distort aftermarket pricing and erode investor confidence. Global research has documented regional variations in pre-IPO reporting behaviour, shaped by differences in institutional frameworks, auditing standards and governance regimes. Recent methodological advances employ behavioural models and machine-learning tools to detect subtle manipulation, while empirical studies continue to assess the long-term implications of pre-IPO earnings management on firm valuation, underpricing and post-listing performance. These insights hold critical relevance for regulators, auditors and market participants seeking to reconcile efficient capital formation with the integrity of financial disclosure.

Research from Nature Portfolio

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Earnings Management in Initial Public Offerings publication trend

The graph below shows the total number of articles in earnings management in initial public offerings across all publications each year (not limited to Nature Index journals).

Technical terms

Earnings management: The intentional alteration of financial reports by shifting revenues, expenses or real activities to influence reported performance.

Discretionary accruals: Accounting adjustments that managers can manipulate within the accrual framework, such as provisioning, bad-debt allowances or depreciation estimates.

Real earnings management: Operational decisions—like changing production volume or timing sales discounts—to affect cash flows and reported income.

Information asymmetry: A situation where one party (usually management) possesses more or better information than external investors, enabling strategic financial reporting.

References

1. Persistence of pre-IPO earnings of new companies from CEE stock markets. Equilibrium Quarterly Journal of Economics and Economic Policy (2022).
2. Earnings management and accounting performance of new firms listings: evidence from the Vietnamese stock market. Cogent Business & Management (2022).
3. External financing and earnings management: Evidence in Vietnam. Cogent Economics & Finance (2022).
4. Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings. SAGE Open (2023).
5. Can we trust the accounting discretion of firms with political money contributions? Evidence from U.S. IPOs. Journal of Accounting and Public Policy (2022).