Information Uncertainty, Earnings Management, and Long-run Stock Performance Following Initial Public Offerings

Authors

  • Sheng-Syan Chen,

  • Wen-Chun Lin,

    Corresponding author
    • Address for correspondence: Wen-Chun Lin, Department of Finance, National Taipei College of Business, No. 321, Sec. 1, Jinan Rd., Taipei 100, Taiwan. e-mail: fnwjlin@webmail.ntcb.edu.tw

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  • Shao-Chi Chang,

  • Chih-Yen Lin

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    • The first author is from the National Taiwan University, Taipei, Taiwan. The second author is from the National Taipei College of Business, Taipei, Taiwan. The third author is from the National Cheng Kung University, Tainan City, Taiwan. The fourth author is from the National Taiwan University, Taipei, Taiwan. The authors wish to thank Martin Walker (the Editor) and an anonymous referee for helpful comments and suggestions. Helpful suggestions from Kevin C. W. Chen, Dosoung Choi, Kim Wai Ho, Frank C. Jen, Rezaul Kabir, Cheng-few Lee, Chi-Chun Liu and T. J. Wong are also appreciated. Seminar participants at the 2008 American Accounting Association Annual Conference and the 2008 Financial Management Association Annual Conference provided many valuable comments. Wen-Chun Lin gratefully acknowledges financial support from the National Science Council of Taiwan (NSC99-2410-H-126-002).


Abstract

We examine how information uncertainty surrounding IPO (initial public offering) firms influences earnings management and long-run stock performance. For low-information-uncertainty issuers, at-issue earnings’ management is positively related to subsequent unmanaged earnings and has no relationship to market reaction to earnings announcement and long-run stock performance following the offering. For high-information-uncertainty issuers, however, at-issue earnings’ management is unrelated to subsequent unmanaged earnings and negatively related to market reaction to earnings announcement and long-run stock performance following the offer. The evidence suggests that, on average, managers in low-information-uncertainty firms tend to engage in earnings’ management for informative purposes, while managers in high-information-uncertainty firms engage in earnings’ management for opportunistic purposes.

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