Accrual Manipulations during IPO Lockup Expiration and the Monitoring Role of Auditors

Abstract

This paper examines the presence of accrual manipulations during initial public offerings (IPOs) lockup period. We predict that insiders (mainly venture capitalists) inflate earnings around the lockup period to increase share price and maximize personal wealth from selling shares at lockup expiration. Consistent with our prediction, we find evidence that IPO firms engage in income-increasing current accruals manipulation in the lockup period. We also examine the impact of auditor quality in this unique setting. We find that IPO firms that hire prestigious auditors experience less earnings management in the lockup period than firms with lower-quality auditors, after controlling for the monitoring role of venture capitalist and underwriter reputation. In addition, IPO firms experience lower levels of earnings management during the fiscal year-end quarters when their financial statements are audited than in the interim quarters when their financials are reviewed.