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Accounting Department's Lecture

TIME: 10:00 Jul3,2018 
PLACE: Room 1008, Business Building
TOPIC:Do IPO Firms Classification Shift? Implications for Price Formation and Post-IPO Stock Performance

SPEAKER:Xiaotao Liu 

LANGUAGE:Chinese and English 


Extant earnings management studies in the initial public offering (IPO) context typically focus on accruals management and bottom-line earnings. Departing from this typical focus, this study investigates whether IPO firms inflate “core” earnings through classification shifting (i.e., misclassifying core expenses as income-decreasing special items) immediately prior to IPOs. We provide initial evidence that IPO firms engage in classification shifting in the pre-IPO period. In addition, IPO firms’ accruals management is negatively associated with classification shifting. More importantly, we find that pre-IPO classification shifting influences IPO price formation. That is, pre-IPO classification shifting is positively associated with the price revision from the mid-point of initial price range to the final offer price, but it is not associated with the initial IPO return. Furthermore, we find that pre-IPO classification shifting is followed by negative post-IPO stock returns. Overall, our findings caution investors, auditors, and regulators that classification shifting, a seemingly innocuous accounting maneuver, can mislead investors in their IPO valuation and inflict financial loss.