The Valuation, Revenue Management, and Subsequent Financial Restatement of IPO Firms

Posted: 9 May 2017 Last revised: 6 Jun 2019

See all articles by Norman Massel

Norman Massel

Louisiana State University, Baton Rouge - Department of Accounting

Jung Eun Park

University of Nebraska Omaha

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting

Date Written: April 7, 2017

Abstract

We demonstrate that investors in initial public offering (IPO) firms value revenues and that IPO managers report revenues opportunistically in the fiscal year just prior to the offer. We also find that these pre-IPO firm financial statements are more likely to be subsequently restated. Our results are consistent with the incentives of managers to report revenues opportunistically outweighing the higher monitoring and regulatory scrutiny pre-IPO. Our findings are in contrast to those presented in Venkataraman, Weber, and Willenborg (2008) and Ball and Shivakumar (2008) who find evidence of more conservative reporting by IPO firms. We note that these two studies use abnormal accruals to reach their inferences, a financial metric that Armstrong, Foster, and Taylor (2016) demonstrate is not value-relevant to IPO investors. Extending Armstrong et al. (2016), we provide evidence that discretionary revenue is value-relevant to IPO investors.

Keywords: Earnings Management, Accruals, Initial Public Offering, Restatements, Revenue Management

JEL Classification: M41, M42

Suggested Citation

Massel, Norman and Park, Jung Eun and Reichelt, Kenneth John, The Valuation, Revenue Management, and Subsequent Financial Restatement of IPO Firms (April 7, 2017). Available at SSRN: https://ssrn.com/abstract=2954646

Norman Massel

Louisiana State University, Baton Rouge - Department of Accounting ( email )

E.J. Ourso College of Business Administration
2800 Business Education Complex
Baton Rouge, LA 70803
United States

Jung Eun Park (Contact Author)

University of Nebraska Omaha ( email )

Mammel Hall 2822BB
6708 Pine Street
Omaha, NE 68182
United States

Kenneth John Reichelt

Louisiana State University, Baton Rouge - Department of Accounting ( email )

2821 Business Education Complex
Baton Rouge, LA 70803
United States
225-578-6233 (Phone)

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