تاثیر کیفیت حسابرسی بر مدیریت سود واقعی و تعهدی در برابر IPOs The impact of audit quality on real and accrual earnings management around IPOs

1. Introduction This paper extends the literatures on earnings management by analysing the impact of audit quality on real and accrual earnings management in the context of Initial Public Offerings (IPOs). Previous work, such as Cohen and Zarowin (2010) and Chi, Lisic and Pevzner (2011), finds firms engage in higher levels of real earnings management to avoid the monitoring of accrual earnings management by big-N audit firms in the context of SEOs. However, there is no work to date on the relationship between the presence of a big-N auditor and whether this affects the real and accrual earning activities of IPO firms. IPOs present an ideal setting in which to examine the impact of enhanced audit quality on the real and accrual earnings management activities of firms.1 Specifically, the IPO event changes firms from being private unlisted companies that are subject to very little oversight and monitoring, to publicly traded companies that have to comply with stringent listing requirements. Moreover, as public companies they are subject to scrutiny by market participants and regulators. Consistent with this view, Teoh, Wong, and Rao (1998) note that incentives and opportunities to manage earnings around the offer year is limited for SEO firms as compared to IPO firms. This difference exists as SEO firms have, more audited public information, analyst followings, a larger market capitalization, and are easier to shortsell. Around an IPO, corporate managers need to maintain high stock prices and are therefore incentivized to undertake earnings management in the year of the IPO to achieve this goal. Teoh et al. (1998a) put forward three reasons why managers are more likely to undertake earnings management during the IPO year to help boost the price of the firm’s shares. First, there is often a lock-up period that restricts managers from immediately selling their holdings after an IPO. A fall in earnings after an IPO could therefore negatively affect stock prices and consequently the value of the entrepreneurs’ investment.2 Consistent with this view, Darrough and Rangan (2005) find that managers reduce R&D expenses at the end of the IPO year to manage earnings upward. This is due to a belief that investors place greater emphasis on current earnings and cutting R&D is therefore beneficial in trying to maintain high share prices.