R&D Expense Management During Initial Public Offerings

• In Event: Financial Accounting and Reporting 6

Abstract

In this paper we demonstrate that IPO firms engage in research and development (R&D) expense management during the initial public offerings (IPOs). We find both types of R&D management during the IPO: R&D underinvestment and R&D overinvestment. We predict and find that probability of R&D underinvestment increases for firms that would reported losses in the absence of R&D management, and for firms with reduced accruals management flexibility (as captured by net operating assets, NOA). The probability of R&D over-investment (R&D management) is higher for growth firms, firms that experience substantial losses, firms with zero sales, and for the firms that belong to science-driven industries. We show that firms overinvesting in R&D have more severe decline in post-IPO performance than firms underinvesting in R&D. Future performance analysis reveals that overinvestment in R&D associated with significant long-term operating underperformance, lower future innovation quality, higher rate of delisting due to poor performance, and higher abnormal volume around the unlock date.

Authors

• Natalya V. Khimich, Drexel University

• Tatiana Fedyk, University of San Francisco