Earnings And Cash Flow Performances Surrounding IPO




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.

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