Earnings And Cash Flow Performances Surrounding Ipo
Abstract
Initial public offerings (IPOs) offer a fruitful area to be explored given the existence of asymmetric information among various parties interested in the IPO. This study attempts to examine whether there is significant increase in earnings level prior to the offering to be interpreted as the existence of earnings management. The behaviour of cash flow from operation is also examined.
A sample of 35 Indonesian IPOs that made public during 2002-2005 periods was examined. The t-test for mean difference was performed to test whether earnings differences persist. The findings show that earnings level tends increase in the year closes to the IPO date, but decrease in the next two year after that. The behaviour of cash flow from operating activities is almost similar. However, this study is unable to state that earnings management is strongly evidenced in Indonesian IPO setting.
Keywords: IPOs, prospectus, earnings and cash flow performance
EARNINGS AND CASH FLOW PERFORMANCES SURROUNDING IPO
1. Introduction
This study examines earnings management of Indonesian initial public offerings (IPO). Companies offering shares publicly for listing are required by the securities law to meet certain financial and operating criteria. Because of the major impact of the offering prices on their private wealth and the explicit use of accounting numbers, particularly accounting earnings, the managers and the major stockholders of IPO firms have the incentives to manage earnings numbers to maximize their private wealth.
According to Healy and Wahlen (1999: 368), earnings management occurs “when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers”. We interpret this broad definition as including earnings management in IPO.
Levitt (1998), former chairman of United States’ capital market regulator, has asserted that aggressive earnings management has been of concern to regulators for several years and that concern has only intensified following evidence of improper accounting practices by Enron, WorldCom, and some other major corporations. Thus, a better understanding of how earnings management occurs could help (1) regulators and standard setters identify the areas most in need of regulatory change; (2) auditors evaluate and report on their clients’ quality of earnings, and train novice auditors about earnings management; (3) CEOs, CFOs, audit committees, and investors focus attention on those areas of the financial statements where they should be most skeptical; (4) managers and audit committees anticipate the transactions that investors will view most skeptically; (5) educators teach students about earnings management; and (6) researchers focus their analyses on areas of high-earnings-management activity.
Jurnal Simposium Nasional Akuntasi XI (SNA 11)
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