Earnings Management and the Long-Run Market Performance of Initial Public Offerings


  • Siew Hong Teoh,

    1. University of Michigan
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  • Ivo Welch,

    1. University of California, Los Angeles
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  • T.J. Wong

    1. University of Science and Technology, Hong Kong
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    • Teoh is at the University of Michigan, Welch is at the University of California, Los Angeles, and Wong is at the University of Science and Technology, Hong Kong. We thank Andrew Alford, Joe Aharony, John Barber, Vic Bernard, Shlomo Bernartzi, Robert Bowen, Laura Field, Steve Hansen, David Hirshleifer, Michael Kirschenheiter, Charles Lee, Tim Loughran, Susan Moyer, Gita Rao, Jay Ritter, Jake Thomas, Dan Tinkelman, Sheridan Titman, and workshop participants at the University of British Columbia, Columbia University, New York University, and the University of Washington for helpful comments. Comments received on related papers presented at the NBER 1995 Corporate Finance seminar, the 1995 CRSP Behavioral Finance conference, the 1995 Sixth Annual Finance, Economics and Accounting Conference, the 1996 AFA Conference, Ohio State University, the University of Michigan, and the University of Rochester were also helpful in shaping this paper. We thank Kent Daniel, Chris James, Mike Maher, and Jay Ritter for data. The accruals data used in this article will be made available at the Journal of Finance WWW site (http://www.cob.ohio-state.edu/dept/fin/journal/jof.htm) and Ivo Welch's WWW site (http://linux.agsm.ucla.edu.edu).


Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most “aggressive” quartile of earnings managers have a three-year aftermarket stock return of approximately 20 percent less than IPO issuers in the most “conservative” quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications.