The Effect of the Accounting Hocus–Pocus on the Management Earnings Forecast Precision in the IPO
The Effect of the Accounting Hocus–Pocus on the Management Earnings Forecast Precision in the IPO

Author(s): Tomasz Sosnowski, Anna Wawryszuk–Misztal
Subject(s): Business Economy / Management, Transformation Period (1990 - 2010), Present Times (2010 - today), Accounting - Business Administration
Published by: Masarykova univerzita nakladatelství
Keywords: IPO; forecast error; real earnings management; discretionary accruals;
Summary/Abstract: Issuers of initial public offerings can make a voluntary decision to post the earnings forecast in the prospectus. This paper explores whether managers of IPO firms take intentional action in the form of earnings management to reduce the forecast error and thereby improve the quality of such forward looking financial information revealed in the going public process. Using a sample of 87 IPOs from Warsaw Stock Exchange between 2006 and 2015 we find that, generally, managers of the new listed companies use discretionary accruals and abnormal cash flows from operations in the periods around the IPO to improve the accuracy of the earnings forecast disclosed in the IPO prospectus. Real earnings management is likely to take place in the year preceding IPO and accruals-based earnings management is used in the IPO and following year.

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