Earnings management around IPO and lockup

Authors:Chih-Jen Huang; Rui-Yi Wu;

Journal: Chia Da Management Review. Dec. 2007, 27(2): 275-296.

Keywords: Initial public offering; Lockup;Earnings management; Discretionary accruals

Abstract:
This research relates finance topics of initial public offerings (IPO) and lockup to examine the hypothesis that the timing of lockup expiration is crucial to the earnings management (EM) behavior in the post-IPO period. The unique two-stage lockup regulations make the Taiwanese sample an excellent candidate for examining this hypothesis. The evidence indicates a strong need of EM lockup period. Significantly positive discretionary accruals (DA) begin from the IPO quarter to the quarter right after expiration of 1(superscript st)-stage lockup. Furthermore, the DA in the quarter of 2(superscript nd)-stage lockup expiration is significantly positive. The Results indicate that the lockup provision is crucial to the literature findings of significant EM in the IPO year and the following year. Examining five specific items of DA, we find notable variation in implementing DA instruments between IPO and lockup periods. Among them, discretionary account receivable and discretionary inventory are most intensively used throughout IPO and both lockup periods. It seems that the reversal nature plays a role in the behavior of DA and of specific DA items. Finally, the regulation change in 2001 did affect the EM behavior in 1st-stage lockup.