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Regulations, earnings management, and post-IPO performance: the Chinese evidence

Version 2 2024-06-13, 10:22
Version 1 2017-01-30, 14:59
journal contribution
posted on 2024-06-13, 10:22 authored by JL Kao, D Wu, Z Yang
In this study, we examine whether government regulatory initiatives in China involving IPO by SOEs may have contributed to opportunistic behaviors by the issuer. We focus on two sets of IPO regulations issued between January 1, 1996 and February 11, 1999: pricing regulations, which stipulate that IPO prices be a function of accounting performance, and penalty regulations, which penalize IPO firms for overly optimistic forecasts. We find that IPO firms that report better pricing-period accounting performance have larger declines in post-IPO profitability, lower first-day stock returns and worse long-run post-IPO stock performance. Furthermore, IPO firms that make overoptimistic forecasts also have lower first-day returns and worse post-IPO stock performance. Using non-core earnings as the proxy for earnings management, we document some evidence that IPO firms that report higher pricing-period accounting performance have engaged in more income-increasing earnings management. Hence, pricing regulations may have induced IPO firms to inflate pricing-period earnings and affect the post-IPO performance negatively. On the other hand, penalty regulations have deterred IPO firms from making overoptimistic earnings forecast and therefore have a positive impact on the behavior of IPO firms.

History

Journal

Journal of banking and finance

Volume

33

Pagination

63-76

Location

Amsterdam, The Netherlands

ISSN

0378-4266

eISSN

1872-6372

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2007, Elsevier

Issue

1

Publisher

Elsevier