Vol. 17 No. 2 (2022)

Articles

Persistence of pre-IPO earnings of new companies from CEE stock markets

Published 25-06-2022

Tomasz Sosnowski
University of Lodz

Abstract

Research background: A company?s earnings are one of the main determinants of investment decisions on the stock market. Thus, the reliability of disclosed financial information is crucial for the efficient allocation of capital. Unfortunately, reported earnings are an economic category susceptible to manipulation. This problem grows especially in the case of an initial public offering (IPO), as there is significant information asymmetry.

Purpose of the article: The main aim of the paper is to assess the persistence of earnings reported by companies in the IPO process and to empirically identify financial characteristics associated with persistence of earnings. The usefulness of financial information is directly related to the issue of earnings quality. Therefore, this paper contributes to the stream of study on the quality of financial reporting of new stock companies.

Methods: I employ a simple single-factor regression model to recognize the earnings persistence in new stock companies. Pre-IPO earnings are the explanatory variable. Then, I use multiple regression analysis to identify factors that influence this metric of reported earnings quality.

Findings & value added: Using a sample of companies from stock exchange markets in Central and Eastern Europe (i.e., the Warsaw Stock Exchange, the Bulgarian Stock Exchange, the Bucharest Stock Exchange, the Belgrade Stock Exchange, the Prague Stock Exchange) that went public between 2010 and 2018, I find that, generally, pre-IPO earnings hold higher persistence compared to earnings reported in the year of the IPO. Profitability seems to be a factor that significantly influences this feature. Thus, the results contribute to corporate theory and practice facing insufficient empirical evidence on the issue of sustaining pre-IPO profitability in the long term, additionally putting these concerns in the context of the economic environment of European emerging stock markets.

Keywords

earnings quality, financial reporting, earnings management, initial public offering, profitability

PDF

References

  1. Agarwal, A., Aggarwal, S. P., & Gupta, S. (2019). Sustainable earnings: a new eye for emerging finance. Journal of Sustainable Finance & Investment, 9(4), 325?348. doi: 10.1080/20430795.2019.1619338. DOI: https://doi.org/10.1080/20430795.2019.1619338
    View in Google Scholar
  2. Albu, N., Albu, C. N., & Gray, S. J. (2020). Institutional factors and the impact of International Financial Reporting Standards: the central and eastern european experience. Accounting Forum, 44(3), 184?214. doi: 10.1080/01559982.2019.1 701793. DOI: https://doi.org/10.1080/01559982.2019.1701793
    View in Google Scholar
  3. Alhadab, M., & Clacher, I. (2018). The impact of audit quality on real and accrual earnings management around IPOs. British Accounting Review, 50(4), 442?461. doi: 10.1016/j.bar.2017.12.003. DOI: https://doi.org/10.1016/j.bar.2017.12.003
    View in Google Scholar
  4. Armstrong, C., Foster, G., & Taylor, D. (2016). Abnormal accruals in newly public companies: opportunistic misreporting or economic activity? Management Science, 62(5), 1316?1338. doi: 10.1287/mnsc.2015.2179. DOI: https://doi.org/10.1287/mnsc.2015.2179
    View in Google Scholar
  5. Ball, R., & Shivakumar, L. (2008). Earnings quality at initial public offerings. Journal of Accounting and Economics, 45(2?3), 324?349. doi: 10.1016/j.jaccec o.2007.12.001. DOI: https://doi.org/10.1016/j.jacceco.2007.12.001
    View in Google Scholar
  6. Benninga, S., Helmantel, M., & Sarig, O. (2005). The timing of initial public offerings. Journal of Financial Economics, 75(1), 115?132. doi: 10.1016/j.jfine co.2003.04.002. DOI: https://doi.org/10.1016/j.jfineco.2003.04.002
    View in Google Scholar
  7. Boucher, C., & Kooli, M. (2022). Anatomy of money-losing IPOs. Research in International Business and Finance, 60, 101623. doi: 10.1016/j.ribaf.2022.101 623. DOI: https://doi.org/10.1016/j.ribaf.2022.101623
    View in Google Scholar
  8. Brzeszczyński, J., Gajda, J., & Schabek, T. (2012). Earnings management in Polish companies. Comparative Economic Research. Central and Eastern Europe, 14(3), 137?150. doi: 10.2478/v10103-011-0023-1. DOI: https://doi.org/10.2478/v10103-011-0023-1
    View in Google Scholar
  9. Calegari, M., & Maretno, H. (2005). The persistence of earnings and corporate governance in IPO firms. Journal of Global Business, 16(32), 47.
    View in Google Scholar
  10. Callao, S., Jarne, J. I., & Wróblewski, D. (2017). Detecting earnings management investigation on different models measuring earnings management for emerging eastern european countries. International Journal of Research -GRANTHAALAYAH, 5(11), 222?259. doi: 10.29121/granthaalayah.v5.i11.2017 .2351. DOI: https://doi.org/10.29121/granthaalayah.v5.i11.2017.2351
    View in Google Scholar
  11. Cherkasova, V., & Rasadi, D. (2017). Earnings quality and investment efficiency: evidence from Eastern Europe. Review of Economic Perspectives, 17(4), 441?468. doi: 10.1515/revecp-2017-0023. DOI: https://doi.org/10.1515/revecp-2017-0023
    View in Google Scholar
  12. Cho, S. M., & Kang, S. A. (2019). The effect of accounting information quality and competition on investment inefficiency: evidence from Korea. Asia-Pacific Journal of Accounting and Economics, 26(4), 489?510. doi: 10.1080/1608162 5.2017.1392879. DOI: https://doi.org/10.1080/16081625.2017.1392879
    View in Google Scholar
  13. Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: a review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2?3), 344?401. doi: 10.1016/j.jacceco.2010. 09.001. DOI: https://doi.org/10.1016/j.jacceco.2010.09.001
    View in Google Scholar
  14. Dechow, P. M., & Ge, W. (2006). The persistence of earnings and cash flows and the role of special items: implications for the accrual anomaly. Review of Accounting Studies, 11(2?3), 253?296. doi: 10.1007/s11142-006-9004-1. DOI: https://doi.org/10.1007/s11142-006-9004-1
    View in Google Scholar
  15. DuCharme, L. L., Malatesta, P. H., & Sefcik, S. E. (2004). Earnings management, stock issues, and shareholder lawsuits. Journal of Financial Economics, 71(1), 27?49. doi: 10.1016/S0304-405X(03)00182-X. DOI: https://doi.org/10.1016/S0304-405X(03)00182-X
    View in Google Scholar
  16. Durana, P., Valaskova, K., Siekelova, A., & Michalkova, L. (2022). Appraisal of earnings management across the sectors. Journal of Business Economics and Management, 23(2), 399?425. doi: 10.3846/jbem.2022.16563. DOI: https://doi.org/10.3846/jbem.2022.16563
    View in Google Scholar
  17. Ebaid, I. E. S. (2011). Persistence of earnings and earnings components: evidence from the emerging capital market of Egypt. International Journal of Disclosure and Governance, 8(2), 174?193. doi: 10.1057/jdg.2010.29. DOI: https://doi.org/10.1057/jdg.2010.29
    View in Google Scholar
  18. Fatma, N., & Hidayat, W. (2019). Earnings persistence, earnings power, and equity valuation in consumer goods firms. Asian Journal of Accounting Research, 5(1), 3?13. doi: 10.1108/ajar-05-2019-0041. DOI: https://doi.org/10.1108/AJAR-05-2019-0041
    View in Google Scholar
  19. Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of Accounting and Economics, 39(2), 295?327. doi: 10.1016/j.jacceco.2004.06.003. DOI: https://doi.org/10.1016/j.jacceco.2004.06.003
    View in Google Scholar
  20. Hutagaol-Martowidjojo, Y., & Widyanto, F. (2018). Earnings quality of Indonesian firms surrounding initial public offerings. International Journal of Accounting, Auditing and Performance Evaluation, 14(1), 47?62. doi: 10.1504 /IJAAPE.2018.089413. DOI: https://doi.org/10.1504/IJAAPE.2018.10010457
    View in Google Scholar
  21. Jamaani, F., & Ahmed, A. D. (2022). The psychological and economic roles of culture on global underpricing difference: a new hierarchical evidence. Journal of Behavioral and Experimental Finance, 33, 100615. doi: 10.1016/j.jbef.20 21.100615. DOI: https://doi.org/10.1016/j.jbef.2021.100615
    View in Google Scholar
  22. Jamaani, F., Alidarous, M., & Alharasis, E. (2022). The combined impact of IFRS mandatory adoption and institutional quality on the IPO companies? underpricing. Journal of Financial Reporting and Accounting. Avance online publication. doi: 10.1108/jfra-07-2021-0199. DOI: https://doi.org/10.1108/JFRA-07-2021-0199
    View in Google Scholar
  23. Kiseľáková, D., Šofranková, B., Onuferová, E., & Čabinová, V. (2019). The eval-uation of competitive position of EU-28 economies with using global multi-criteria indices. Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(3), 441?462. doi: 10.24136/eq.2019.021. DOI: https://doi.org/10.24136/eq.2019.021
    View in Google Scholar
  24. Kliestik, T., Belas, J., Valaskova, K., Nica, E., & Durana, P. (2021). Earnings management in V4 countries: the evidence of earnings smoothing and inflating. Economic Research-Ekonomska Istraživanja, 34(1), 1452?1470. doi: 10.1080 /1331677X.2020.1831944. DOI: https://doi.org/10.1080/1331677X.2020.1831944
    View in Google Scholar
  25. Krastev, V., Durana, P., & Valaskova, K. (2021). Earnings management under a global magnifier. SHS Web of Conferences, 92, 02032. doi: 10.1051/shsconf/ 20219202032. DOI: https://doi.org/10.1051/shsconf/20219202032
    View in Google Scholar
  26. Lestari, S. P., & Khafid, M. (2021). The role of company size in moderating the effect of profitability, profit growth, leverage, and liquidity on earnings quality. Accounting Analysis Journal, 10(2), 86?93.
    View in Google Scholar
  27. Li, V. (2019). The effect of real earnings management on the persistence and informativeness of earnings. British Accounting Review, 51(4), 402?423. doi: 10.1016/j.bar.2019.02.005. DOI: https://doi.org/10.1016/j.bar.2019.02.005
    View in Google Scholar
  28. Lizińska, J., & Czapiewski, L. (2018). Towards economic corporate sustainability in reporting: what does earnings management around equity offerings mean for long-term performance? Sustainability, 10(12), 4349. doi: 10.3390/su101243 49. DOI: https://doi.org/10.3390/su10124349
    View in Google Scholar
  29. Lizińska, J., & Czapiewski, L. (2019). Is window-dressing around going public beneficial? Evidence from Poland. Journal of Risk and Financial Management, 12(1), 18. doi: 10.3390/jrfm12010018. DOI: https://doi.org/10.3390/jrfm12010018
    View in Google Scholar
  30. Meluzin, T., Balcerzak, A. P., Pietrzak, M. B., Zinecker, M., Doubravsky, K. (2018a). The impact of rumours related to political and macroeconomic uncertainty on IPO success: evidence from a qualitative model. Transformations in Business & Economics, 17(2), 148?169.
    View in Google Scholar
  31. Meluzín, T., Zinecker, M., Balcerzak, A. P., & Pietrzak, M. B. (2018b). Why do companies stay private? determinants for IPO candidates to consider in Poland and the Czech Republic. Eastern European Economics, 56(6), 471?503. doi: 10.1080/00128775.2018.1496795. DOI: https://doi.org/10.1080/00128775.2018.1496795
    View in Google Scholar
  32. Meluzín, T., Zinecker, M., Balcerzak, A. P., Pietrzak, M. B., & Doubravský, K. (2021). Institutional settings and their impact on the IPO activity: an explorato-ry study based on qualitative modelling. Acta Polytechnica Hungarica, 18(2), 215?235. doi: 10.12700/aph.18.2.2021.2.12. DOI: https://doi.org/10.12700/APH.18.2.2021.2.12
    View in Google Scholar
  33. Michalkova, L. (2021). Earnings quality and accruals over company´s life cycle. SHS Web of Conferences, 92, 02043. doi: 10.1051/shsconf/20219202043. DOI: https://doi.org/10.1051/shsconf/20219202043
    View in Google Scholar
  34. Miloud, T. (2013). Earnings management and initial public offerings: an empirical analysis. Journal of Applied Business Research (JABR), 30(1), 117. doi: 10.190 30/jabr.v30i1.8288. DOI: https://doi.org/10.19030/jabr.v30i1.8288
    View in Google Scholar
  35. Nikbakht, E., Sarkar, S., Smith, G. C., & Spieler, A. C. (2021). Pre-IPO earnings management: evidence from India. Journal of International Accounting, Auditing and Taxation, 44, 100400. doi: 10.1016/j.intaccaudtax.2021.100400. DOI: https://doi.org/10.1016/j.intaccaudtax.2021.100400
    View in Google Scholar
  36. Pincus, M., Rajgopal, S., & Venkatachalam, M. (2007). The accrual anomaly: International evidence. Accounting Review, 82(1), 169?203. DOI: https://doi.org/10.2308/accr.2007.82.1.169
    View in Google Scholar
  37. Piosik, A., & Strojek-Filus, M. (2013). An assessment of the application of earnings management objectives and instruments in financial reporting ? evidence of survey research results. Annals of the Alexandru Ioan Cuza University - Economics, 60(2), 148?173. doi: 10.2478/aicue-2013-0022. DOI: https://doi.org/10.2478/aicue-2013-0022
    View in Google Scholar
  38. Setiawan, B., Saleem, A., Nathan, R. J., Zeman, Z., Magda, R., & Barczi, J. (2021). Financial market development and economic growth: evidence from ASEAN and CEE Region. Polish Journal of Management Studies, 23(2), 481?494. doi: 10.17512/pjms.2021.23.2.29. DOI: https://doi.org/10.17512/pjms.2021.23.2.29
    View in Google Scholar
  39. Siekelova, A., Valaskova, K., & Machova, V. (2020). Earnings management initiatives and selected characteristics of an entity: a case study of the Visegrad Four. Problems and Perspectives in Management, 18(3), 28?41. doi: 10.21511 /ppm.18(3).2020.03. DOI: https://doi.org/10.21511/ppm.18(3).2020.03
    View in Google Scholar
  40. Sletten, E., Ertimur, Y., Sunder, J., & Weber, J. (2018). When and why do IPO firms manage earnings? Review of Accounting Studies, 23(3), 872?906. doi: 10.1007/s11142-018-9445-3. DOI: https://doi.org/10.1007/s11142-018-9445-3
    View in Google Scholar
  41. Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Review, 71(3), 289?315.
    View in Google Scholar
  42. Sosnowski, T. (2018). Earnings management in the private equity divestment process on Warsaw Stock Exchange. Equilibrium. Quarterly Journal of Economics and Economic Policy, 13(4), 689?705. doi: 10.24136/eq.2018.033. DOI: https://doi.org/10.24136/eq.2018.033
    View in Google Scholar
  43. Sosnowski, T. (2021). The credibility of earnings announced by new stock compa-nies: accrual and real earnings management. Equilibrium. Quarterly Journal of Economics and Economic Policy, 16(3), 661?677. doi: 10.24136/eq.2021. 024. DOI: https://doi.org/10.24136/eq.2021.024
    View in Google Scholar
  44. Stevanović, S., Minović, J., & Marinković, G. (2021). Earnings and cash flow per-sistence: case of medium agriculture enterprises in Serbia. Ekonomika Poljo-privrede, 68(1), 141?153. doi: 10.5937/ekopolj2101141s. DOI: https://doi.org/10.5937/ekoPolj2101141S
    View in Google Scholar
  45. Valaskova, K., Adamko, P., Frajtova Michalikova, K., & Macek, J. (2021). Quo Vadis, earnings management? analysis of manipulation determinants in Cen-tral European environment. Oeconomia Copernicana, 12(3), 631?669. doi: 10.24136/oc.2021.021. DOI: https://doi.org/10.24136/oc.2021.021
    View in Google Scholar
  46. Venkataraman, R., Weber, J. P., & Willenborg, M. (2008). Litigation risk, audit quality, and audit fees: evidence from initial public offerings. Accounting Review, 83(5), 1315?1345. doi: 10.2308/accr.2008.83.5.1315. DOI: https://doi.org/10.2308/accr.2008.83.5.1315
    View in Google Scholar
  47. Závodný, L. (2021). Relevance versus reliability trade-off in financial reporting among companies listed at Visegrad Group Stock Exchanges. European Financial and Accounting Journal, 16(1), 7?24. doi: 10.18267/j.efaj.246. DOI: https://doi.org/10.18267/j.efaj.246
    View in Google Scholar
  48. Zhai, J., & Wang, Y. (2016). Accounting information quality, governance efficiency and capital investment choice. China Journal of Accounting Research, 9(4), 251?266. doi: 10.1016/j.cjar.2016.08.001. DOI: https://doi.org/10.1016/j.cjar.2016.08.001
    View in Google Scholar

Similar Articles

1-10 of 315

You may also start an advanced similarity search for this article.