Earnings Accruals and Real Activities Management around Initial Public Offerings: Evidence from Specific Industries

242 Pages·2014·8.85 MB·English

by  Peter Ising (auth.)

Earnings Accruals and
Real Activities Management
around Initial Public Offerings
Peter Ising
Earnings Accruals
and Real Activities
Management around
Initial Public Offerings
Evidence from Specifi c Industries
Peter Ising
Zurich, Switzerland
Dissertation University of Zurich, 2013
ISBN 978-3-658-03793-2 ISBN 978-3-658-03794-9 (eBook)
DOI 10.1007/978-3-658-03794-9
Th e Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografi e;
detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.
Library of Congress Control Number: 2013950219
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To my family
Foreword VII
Foreword
The present book by Peter Ising ties in with research in the area of earnings management. The
procedural method consists of analyzing initial public offerings which are expected to have a
high probability for strong incentives to use discretionary behavior. The author derives
hypotheses for the US capital market and conducts tests with capacious data.
The first group of hypotheses primarily tests if discretionary reporting during initial public
offerings exists. To uncover real activities management, the dissertation includes several
accounting items as well as the typically employed accruals. The outcome of the thesis
demonstrates that real activities management before and after going public in the US exists.
Current literature differs about the existence of accruals management. To shed light on these
diverging results, the author takes several dimensions into account. On the one hand, he
differentiates between points in time around the IPO and on the other hand between
industries. Both issues are not covered sufficiently, yet. Findings show that a differentiation
between both subjects can have a substantial influence on results. Furthermore, the thesis
includes a separation between profitable and unprofitable companies. This distinction is rarely
used in prior literature, but results show interesting implications for research and practice,
because plenty of companies in certain industries are unprofitable around the IPO.
The second group of hypotheses focusses primarily on differences between specific
accounting items in certain industries. Especially the finance literature examined differences
in financial ratios for firms around the IPO. The presented revelation that growth industries
use expense accounts to a larger extent than established industries around issuing stock to
influence investors supports practitioners in analyzing companies. While prior literature
mainly expected the reduction of expenses to increase income, the author evidences abnormal
increases in growth industries. The results are a valuable source against the background that
growth companies are evaluated by their future prospects.
To conclude, the multi-dimensional approach which combines several research components
must be highlighted because it is challenging and gives interesting insights. The selected
research questions refer not only to open issues in research, but also offer valuable and
detailed guidance for practitioners. I recommend this thesis to researchers and professionals,
and wish that it wins the broad readership it deserves.
Prof. Dr. Dieter Pfaff
Acknowledgment IX
Acknowledgment
This dissertation is the result of my doctoral studies in Zurich, Switzerland. The time during
these years was insightful and enriching. I would like to thank everyone who supported me
and made my time at the University of Zurich such a unique experience.
First, I express my gratitude to the supervisor of my dissertation and my academic mentor,
Prof. Dr. Dieter Pfaff. During my employment at his Chair of Accounting he was available at
all times for arising questions and continuously supported the dissertation. Moreover, he
advocated extra-curricular activities such as my IFRS-Accountant diploma or the teaching
assignment at the Controller Academy. Especially, I thank him for the academic freedom to
pursue my favorite topic at the crossroads of accounting and capital markets. I also thank
Prof. Dr. Conrad Meyer for being my second supervisor.
There are many people who have made the dissertation and the work as a researcher a
pleasant experience. My thanks go to all my doctoral colleagues, administrative assistants,
and friends at the several chairs of business administration for academic and leisure time
collaboration. In the course of developing my dissertation I benefitted from the interaction
with numerous practitioners and scholars at conferences in Harvard, London, Amsterdam,
Prague, WHU Vallendar, and Zurich. Due to the financial support of several scholarships from
the Graduate School of Business, I was able to attend these valuable events.
Most importantly, my education and this dissertation would not have been possible without
the support of my family. My deepest gratitude goes to my parents. My father Dr. Achim Ising
and my mother Heidi Ising encouraged me to follow my interests, gave me guidance, and
pointed out how to proceed in life. I very much appreciate the support by my brother
Dr. Alexander Ising at every stage in my life. Furthermore, I owe gratitude to Meike for
continuous moral encouragement and advice. Many thanks to all for supporting my work!
Peter Ising
Table of Contents XI
Table of Contents
Table of Contents............................................................................................................... XI
List of Abbreviations and Symbols ............................................................................... XVII
List of Figures ..................................................................................................................XXI
List of Tables ................................................................................................................XXIII
1. Introduction ..................................................................................................................... 1
1.1 Motivation .................................................................................................................. 1
1.2 Objective..................................................................................................................... 4
2. Initial Public Offerings .................................................................................................... 5
2.1 Process of an IPO ........................................................................................................ 5
2.2 Motivations for Going Public ...................................................................................... 7
2.3 Industry Differences .................................................................................................... 9
3. Discretionary Reporting ................................................................................................ 11
3.1 Definition .................................................................................................................. 11
3.2 Earnings Accruals and Real Activities Management .................................................. 14
3.2.1 Earnings Accruals Management ..................................................................... 14
3.2.2 Real Activity Management............................................................................. 16
3.2.2.1 Overview ................................................................................................ 16
3.2.2.2 Sales ....................................................................................................... 17
3.2.2.3 CfO ......................................................................................................... 19
3.2.2.4 R&D ....................................................................................................... 19
3.2.2.5 SG&A ..................................................................................................... 20
3.2.2.6 Advertising ............................................................................................. 20
3.2.2.7 Discretionary Expenses ........................................................................... 21
3.2.2.8 Change in Inventory ................................................................................ 21
3.2.2.9 COGS ..................................................................................................... 22
3.2.2.10 Production .............................................................................................. 23
3.2.2.11 GAS ........................................................................................................ 23
3.3 IPO Specifics ............................................................................................................ 24
3.3.1 Agents and Motivation ................................................................................... 24
3.3.2 Discretionary Reporting ................................................................................. 26
3.3.2.1 Time ....................................................................................................... 26
3.3.2.2 Inflation vs. Deflation ............................................................................. 28
4. Literature Overview ...................................................................................................... 30
4.1 State of Research....................................................................................................... 30
4.2 Earnings Accruals Management ................................................................................ 31
XII Table of Contents
4.2.1 Teoh et al. (1998b) ......................................................................................... 31
4.2.2 Ball/Shivakumar (2008) ................................................................................. 32
4.3 Real Activities Management ..................................................................................... 32
4.3.1 Roychowdhury (2006) ................................................................................... 32
4.3.2 Gunny (2010) ................................................................................................ 34
4.4 Multi-Dimensional Approaches ................................................................................. 34
4.4.1 Cohen/Zarowin (2010) ................................................................................... 34
4.4.2 Fedyk et al. (2012) ......................................................................................... 35
5. Hypotheses and Models ................................................................................................. 37
5.1 Hypotheses Development .......................................................................................... 37
5.1.1 Research Aspects ........................................................................................... 37
5.1.2 Hypotheses for Periods around IPO ............................................................... 38
5.1.2.1 Distinction between Years....................................................................... 38
5.1.2.2 Specifics of Sales and CfO ...................................................................... 42
5.1.2.2.1 Hypothesis Sales 2.............................................................................. 42
5.1.2.2.2 Hypothesis Cash Flow 2 ..................................................................... 43
5.1.3 Hypotheses for Specific Industries ................................................................. 44
5.1.3.1 High-Growth vs. Well-Established Industries .......................................... 44
5.1.3.2 Profitable vs. Unprofitable Industries ...................................................... 48
5.2 Econometric Models ................................................................................................. 51
5.2.1 General .......................................................................................................... 51
5.2.2 Accruals and Real Activity Models ................................................................ 53
5.2.2.1 Earnings Accruals Models....................................................................... 53
5.2.2.2 Sales Models ........................................................................................... 54
5.2.2.3 Specific Real Activity Models ................................................................. 56
5.2.3 Research Design ............................................................................................ 60
6. Empirical Study ............................................................................................................. 64
6.1 Sample and Data ....................................................................................................... 64
6.2 Descriptive Statistics ................................................................................................. 66
6.3 Empirical Results ...................................................................................................... 82
6.3.1 Results for Periods around IPO ...................................................................... 82
6.3.1.1 Hypothesis Earnings Accruals 1 .............................................................. 82
6.3.1.1.1 Biotech ............................................................................................... 82
6.3.1.1.2 Internet ............................................................................................... 85
6.3.1.1.3 Technology ........................................................................................ 85
6.3.1.1.4 Construction ....................................................................................... 86
6.3.1.1.5 Wholesale........................................................................................... 86
6.3.1.2 Hypotheses Sales 1 and 2 ........................................................................ 87
6.3.1.2.1 Biotech ............................................................................................... 87
Table of Contents XIII
6.3.1.2.2 Internet ............................................................................................... 92
6.3.1.2.3 Technology ........................................................................................ 94
6.3.1.2.4 Construction ....................................................................................... 95
6.3.1.2.5 Wholesale........................................................................................... 96
6.3.1.2.6 Hypothesis Sales 2.............................................................................. 97
6.3.1.3 Hypotheses CfO 1 and 2 ......................................................................... 97
6.3.1.3.1 Biotech ............................................................................................... 97
6.3.1.3.2 Internet ............................................................................................... 99
6.3.1.3.3 Technology ...................................................................................... 101
6.3.1.3.4 Construction ..................................................................................... 102
6.3.1.3.5 Wholesale......................................................................................... 102
6.3.1.3.6 Hypothesis CfO 2 ............................................................................. 103
6.3.1.4 Hypothesis R&D 1 ................................................................................ 104
6.3.1.4.1 Biotech ............................................................................................. 104
6.3.1.4.2 Internet ............................................................................................. 107
6.3.1.4.3 Technology ...................................................................................... 108
6.3.1.4.4 Construction ..................................................................................... 109
6.3.1.4.5 Wholesale......................................................................................... 109
6.3.1.5 Hypothesis SG&A 1 ............................................................................. 110
6.3.1.5.1 Biotech ............................................................................................. 110
6.3.1.5.2 Internet ............................................................................................. 111
6.3.1.5.3 Technology ...................................................................................... 113
6.3.1.5.4 Construction ..................................................................................... 114
6.3.1.5.5 Wholesale......................................................................................... 115
6.3.1.6 Hypothesis Advertising 1 ...................................................................... 115
6.3.1.6.1 Biotech ............................................................................................. 115
6.3.1.6.2 Internet ............................................................................................. 116
6.3.1.6.3 Technology ...................................................................................... 118
6.3.1.6.4 Construction ..................................................................................... 118
6.3.1.6.5 Wholesale......................................................................................... 118
6.3.1.7 Hypothesis Discretionary Expenses 1 .................................................... 119
6.3.1.7.1 Biotech ............................................................................................. 119
6.3.1.7.2 Internet ............................................................................................. 122
6.3.1.7.3 Technology ...................................................................................... 122
6.3.1.7.4 Construction ..................................................................................... 123
6.3.1.7.5 Wholesale......................................................................................... 124
6.3.1.8 Hypothesis Change in Inventory 1......................................................... 124
6.3.1.8.1 Biotech ............................................................................................. 124
6.3.1.8.2 Internet ............................................................................................. 127