The Impact of Competition on Earnings Management Strategy: Evidence from IPO Spillover Effect.

• In Event: Strategic Disclosures 2

Abstract

This paper investigates how industry peer firms engage in earnings management in response to competitive pressure. We test the effect in a setting where the peer firms have more competitive pressure after a large IPO in the industry. Using a sample of 154 largest initial public offerings (IPOs) from 1994 to 2011, we find that the peer firms engage in more real earnings management after the large IPOs. We also find that such real earnings management is mainly through cutting discretionary expense. We do not find significant changes in peer firms’ accrual earnings management around the IPO event. Our finding of real earnings management is supported by additional tests based on propensity-score matching and difference-in-difference tests with alternative testing windows. We advance the understanding of real earnings management by examining the impact of industry competition.

Authors

• Huimin Chen, Rensselaer Polytechnic Institute

• Qiang Wu, Rensselaer Polytechnic Institute

• Bill Francis, Rensselaer Polytechnic Institute