EARNINGS AND CASH FLOW PERFORMANCES SURROUNDING
IPO
Abstract
Initial public offerings (IPOs)
offer a fruitful area to be explored given the existence of asymmetric
information among various parties interested in the IPO. This study attempts to
examine whether there is significant increase in earnings level prior to the
offering to be interpreted as the existence of earnings management. The
behaviour of cash flow from operation is also examined.
A sample of 35 Indonesian IPOs that
made public during 2002-2005 periods was examined. The t-test for mean
difference was performed to test whether earnings differences persist. The
findings show that earnings level tends increase in the year closes to the IPO
date, but decrease in the next two year after that. The behaviour of cash flow
from operating activities is almost similar. However, this study is unable to
state that earnings management is strongly evidenced in Indonesian IPO setting.
Keywords: IPOs, prospectus, earnings and cash flow performance
Introduction
This study examines
earnings management of Indonesian initial
public offerings (IPO). Companies offering shares publicly for listing are
required by the securities law to meet certain financial and operating
criteria. Because of the major impact of the offering prices on their private
wealth and the explicit use of accounting numbers, particularly accounting
earnings, the managers and the major stockholders of IPO firms have the
incentives to manage earnings numbers to maximize their private wealth.
According
to Healy and Wahlen (1999: 368), earnings management occurs "when managers
use judgment in financial reporting and in structuring transactions to alter
financial reports to either mislead some stakeholders about the underlying
economic performance of the company or to influence contractual outcomes that
depend on reported accounting numbers". We interpret this broad definition
as including earnings management in IPO.
Levitt (1998), former chairman
of United States’ capital market regulator, has asserted that aggressive
earnings management has been of concern to regulators for several years and that
concern has only intensified following evidence of improper accounting practices
by Enron, WorldCom, and
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