The Listing Cohort Phenomenon and Some Improvements in the Measurement of Real Activity Manipulation

• In Event: Real Earnings Management and The Cost of Misreporting

Abstract

Each new cohort of firms entering an industry uses higher amounts of intangible inputs in its production function than its predecessor. Also, IPO wave phenomenon causes the clustering of IPOs of similar production technology firms within a broad industry category. More important, differences in the production functions of successive cohorts within an industry persist. The oldest and the newest cohorts in an industry, thus, lie at the opposite ends of the spectrum of not just the intangible intensity but also the financial and accounting characteristics associated with it. Deviations in intangible intensity from the industry averages, however, are interpreted as real activity manipulation (RAM). Hence, the outermost cohorts display the largest RAMs, in opposite directions. RAM is measured with significant estimation bias, inclusive of cohort’s innate production function. This bias does not get purged despite controlling for size, growth, profitability. I suggest a cohort control to improve the construct validity of RAM measures.

Author

• Anup Srivastava, Dartmouth College