Ownership dilution and earnings management: evidence from Indian IPOs

Abstract

Purpose

Prior research on earnings management largely assumes that newly public firms manage earnings opportunistically around IPOs. However, only a few studies have empirically examined the real motives behind newly public firms’ earnings management. The purpose of this paper is to examine the impact of ownership dilution on earnings management among IPO firms. The authors chose the setting of security offerings in an emerging market, which is characterised by unique ownership structure, to examine the possible incentive of owners or pre-IPO shareholders to engage in earnings management.

Design/methodology/approach

The study employs accrual and real transactions measures to check the presence of earnings management among 409 IPO firms from India during the period 2000‒2018. Subsequently, using ordinary least squares regression models with heteroscedasticity-robust standard errors, this paper examines the relationship between earnings management and selling or dilution incentives of pre-IPO shareholders.

Findings

The study finds that the degree of earnings manipulation by issuer firms is positively associated with the ownership dilution at the time of IPO as well as around lockup expiration.

Practical implications

The findings of this study will help the investors and regulators to understand the practice of earnings management among IPO firms and how it is linked to the ownership dilution of pre-IPO shareholders.

Originality/value

The paper contributes to the limited stream of research that investigates the motives of earnings management among IPO firms. It empirically establishes an association between the selling incentive of pre-IPO shareholders and earnings management.

Citation

Purayil, P.V. and Lukose P.J., J. (2020), "Ownership dilution and earnings management: evidence from Indian IPOs", Managerial Finance, Vol. 46 No. 3, pp. 344-359. https://doi.org/10.1108/MF-02-2019-0068