The impact of credit ratings and CEOs’ work experience on earnings management and post-issue performance of U.S. IPOs
Pham, Hang Minh
The IPO market is characterised by a high level of information asymmetry; thus, self-interested managers have strong incentives to overstate earnings during the IPO to inflate stock prices. Prior literature has provided evidence of earnings manipulation by managers around IPOs. If managers opportunitically manipulate earnings in the IPO year, the reported earnings will not be sustainable, and the IPO firms will exhibit negative abnormal stock returns in subsequent periods due to investors’ downward adjustment of their evaluation of the firm value. Another common phenomenon of the IPO markets is the underperformance of IPO firms in the post-issue periods, with nearly a third of issuers either failing or being acquired within five years of going public. Therefore, in this thesis, I aim to examine potential factors contributing to restraining the level of earnings management undertaken by IPO firms and improving the post-issue long-term performance. Specifically, I investigate the impact of credit ratings and CEOs’ work experience on earnings management and post-issue performance of newly listed firms.\ud \ud I uncover strong evidence that newly listed firms going public with a credit rating are less likely to engage in income-enhancing earnings management through both accruals and real operating activities manipulation. Moreover, while unrated IPO firms manipulate earnings to mislead investors, rated issuers tend to employ accounting discretion for informative purposes. I also study the association between CEOs’ financial experience and earnings management around IPOs and find that IPO firms with financial expert CEOs are less likely to manage earnings through accruals. Furthermore, financial expert CEOs tend to be informative in financial reporting to allow investors to properly gauge the fair value of the firm. In addition, I investigate the influence of CEOs’ specialist managerial experience on the probability of failure and survivability of IPO firms. My findings suggest that specialist CEOs enhance the ability of IPO firms to remain viable for a longer period of time.\ud \ud My research not only contributes to a wide range of literature on IPOs, credit ratings, earnings management and managerial attributes but also provides several practical implications for regulators in monitoring IPO firms’ financial reporting, for investors in making investment decisions, and for firms in considering relevant work experience for CEO appointment.