Real and Accrual Earnings Management, Does Ownership Retention Matters? Evidence from Emerging Market IPOs

Abstract

The paper investigated the real and accrual earnings discretionary behaviour of Malaysian IPO firms contemporaneously in terms of nature, direction and quantum. It investigates the discretionary behaviour according to year of listing, industrial sectors, individual accounting items and the impact of ownership retention. The sample consists of 253 Malaysian IPO firms from 2002-2013. The 1991,modified Jones and Roychowdhury, (2006) cross sectional models were used to investigate accrual and real activity discretionary behaviour. The results indicate significant positive abnormal real earnings management and a significant difference in earning management proxies across industrial sectors. Retained ownership is negatively associated with earnings management proxies which seem to support the alignment hypothesis. The study justifies the merging of Main and Second boards and recommend tightening of regulations to constrain real activity discretionary behaviour. It provides academics, analysts, regulators and other gatekeepers with better understanding of earnings management around the IPO event.

Keywords: Real and Accrual Earnings Management, Initial Public Offering, ownership Retention