Strategic Conservative Earnings Management of Technology Firms: Evidence from the IPO Market
Article first published online: 16 NOV 2012
© 2012 New York University Salomon Center and Wiley Periodicals, Inc.
Financial Markets, Institutions & Instruments
Volume 21, Issue 5, pages 261–293, December 2012
How to Cite
Francis, B. B., Hasan, I. and Zhou, M. (2012), Strategic Conservative Earnings Management of Technology Firms: Evidence from the IPO Market. Financial Markets, Institutions & Instruments, 21: 261–293. doi: 10.1111/fmii.12001
- Issue published online: 16 NOV 2012
- Article first published online: 16 NOV 2012
- Conservative Earnings Management;
- Technology IPOs;
- Litigation Risk
In this paper, we investigate the conservative earnings management strategies of technology firms in the IPO market. We hypothesize that technology IPOs, due to their fewer tangible assets, more information asymmetry, and higher uncertainties of future cash flows, tend to have higher litigation risk. At equilibrium, technology firms are more motivated to strategically employ conservative earnings management during the IPO process, to mitigate their higher litigation risk. Using a sample of U.S. IPOs, we find that technology IPOs, on average, involve significantly more conservative earnings management, especially during the bubble periods. Our results also show that the conservative earnings management strategies of technology firms tends to have a greater impact on their underpricing than for non-tech firms, and thus effectively reduce their risk of being a target in the securities class action lawsuits.