THE ACCURACY OF EARNINGS FORECAST AND POST-IPO EARNINGS MANAGEMENT

Prior studies show that before IPO, many companies conduct earnings management in order to attract potential investors through impressive earnings figures. This is study aims to investigate the tendency of earnings management practice after the IPO. This practice of earnings management is motivated to achieve the earnings forecast disclosed in the IPO prospectus. In order to preserve their reputation, managers put their best efforts to achieve their forecasts, including conducting earnings management. Using a total of 165 IPOs brought to market in year 2000-2010, this study employs descriptive analysis to identify the difference of earnings management indicator between the forecasters and non-forecasters. A cross-section analysis is conducted to test the difference of earnings management indicator among the forecasters. Then, controlling for audit quality, ownership, firm size, and firm leverage, a regression analysis is performed to test the impact of earnings forecasts accuracy on the earnings management. The result of this research shows that there is an indication the forecasters conduct more earnings management than the non-forecasters. However, the difference is statistically insignificant. The study finds that forecast accuracy is significantly related to managers’ behavior to manage post-IPO earnings. Further analysis shows that there is a significant difference in earnings management among the forecasters, in which optimistic forecasters tend to engage more in more earning management through discretionary accrual than conservative forecasters. The cross section analysis confirms that optimistic earnings forecast strengthens the relationship of forecast accuracy and post-IPO earnings management, while high audit quality fails to weaken it. Post-IPO earnings management after IPO is also affected by company size, but not by ownership structure, and firm’s leverage.