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Review of Quantitative Finance and Accounting

Erschienen in:

01.01.2014 | Original Research

Earnings management and IPO anomalies in China

verfasst von: Zhe Shen, Jerry Coakley, Norvald Instefjord

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2014

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Abstract

This paper empirically examines the impact of earnings management and investor sentiment on IPO anomalies using a sample of 506 Chinese IPOs issued over the 1998–2003 period. We develop a parsimonious pricing model in which both the offer price and the short-term aftermarket price are influenced by the use of earnings management, and show that the offer price can be below the fair price while the short-term equilibrium price in the aftermarket can be overvalued due to investor sentiment. Consistent with the overreaction hypothesis, the empirical results reveal a positive relation between the initial return and managed accruals and a negative relation between the long-term stock performance and the initial return. Earnings management appears to generate a pattern where the initial price following an IPO tends to be inflated by overreaction in the secondary market but adjusts to its fundamental level in the long run. These findings are robust across a variety of test specifications.

Vorheriger Artikel Corporate tax avoidance and the timeliness of annual earnings announcements

Nächster Artikel Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index

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Similarly, Li’s (2011) findings on discretionary current accruals and US IPOs are difficult to reconcile with behavioral biases and limited arbitrage.

The average aggregate earnings management is defined as the average country ranking of EM1, EM2, EM3 and EM4, respectively defined as the median ratio in country i of the firm-level standard deviations of operating earnings over the cash flow from operations (both scaled by lagged total assets), multiplied by −1, the cross-sectional correlation in country i between the change in accruals and change in cash flows from operations (both scaled by lagged total assets), multiplied by −1, the median ratio in country i of the absolute value of accruals over the absolute value of cash flow from operations, and the ratio in country i of the number of firms operating small profits over the sum of the number of firms reporting small losses and profits. A smaller profit (loss) is defined as a value of net earnings scaled by lagged total assets in the range [0, 0.01] ([−0.01, 0]).

The average earnings opacity is defined as the average country i decile ranking across EM2, EM4 and earnings aggressiveness. Earnings aggressiveness is the median ratio in country i of total accruals over the lagged total assets.

See Guo et al. (2011) for an interesting and up to date review of the empirical literature on the underpricing of Chinese IPOs. Nagata and Hachiya (2007) provide a link between the nature of earnings management and underpricing in Japanese IPOs.

Under the fixed price approach, the IPO price was determined by the product of EPS and a regulatory P/E multiple. Up until the year end of 1996, the EPS used for pricing was defined as the EPS in the past year and the forecasted EPS. Then it changed to use the average of EPS in the past 3 years during the 1996–1998 period and the average of EPS in the IPO year and the past year weighted by the number of shares outstanding during the 1998–1999 period. Under the book-building approach, the IPO price was determined based on interest solicited from (1) institutional investors offline, (2) both institutional investors offline and retail investors online, (3) both institutional investors and retail investors online. See more details in Ma and Faff (2007).

SHSE A-share Index and SZSE A-share Composite Index.

See the CSRC announcement in year 1996 on several issues regarding stock issuance.

An updated version of their cross-country study is available at Jay Ritter’s website. The average underpricing over the 1990–2010 period is 137.4 %.

We check the industry specifications of the firms year by year in case firms change their core business from one industry to another in the years after the IPO.

However, Shen (2007) further examines this relation and find that this relationship is primarily driven by the inclusion of IPOs issued in the early 1990s where exceptionally high levels of underpricing and extremely lengthy time lags were common. When these early issues are excluded, the positive relation between the time lag and underpricing breaks down and no longer holds.

The first group of 506 IPOs is obtained when we use industry information to generate the coefficient of the modified Jones model while the second group of 337 IPOs is smaller in sample size since we use sector information to proceed. There are no appropriate non-IPO benchmarks for some particular sectors so we end up with a smaller group.

The Chinese listed companies are required to release their audited annual reports by the end of the following April.

See also Subramanyam (1996) and Xie (2001) among others.

In the unreported regression which does not include any accrual variable, the coefficient on IR is negative (−0.12) with a t-value of −4.19.

Detailed results are available from the authors upon request.

For example, Jones (1991), Dechow et al. (1995), Subramanyam (1996), Teoh et al. (1998a) and (1998b), Rangan (1998), Hribar and Collins (2002), Kim and Park (2005).

We do not use other models such as Dechow and Dichev (2002) as the data before companies go public are not readily available for our sample of Chinese IPOs.

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Titel: Earnings management and IPO anomalies in China
verfasst von: Zhe Shen
Jerry Coakley
Norvald Instefjord
Publikationsdatum: 01.01.2014
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2014
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-012-0334-8

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