Earnings Management and Stock Price Behavior around IPOs

Under the Financial Instruments and Exchange Act, the managers of an IPO firm are not allowed to sell their own shares for a certain time period after the IPO, which is well known as the lockup period. We examine whether the first fiscal year end of an IPO firm lies before the expiration date of the lockup period affects the earnings management decision and therefore stock market reactions. Our main results are as follows. For IPO firms whose fiscal ends lie within the lockup period, the discretionary accruals are negatively correlated with the firm age and the size of the auditing firms. However such relations are not observed for other IPO firms. Though the stock markets are temporarily misled by the information about discretionary accruals, it is not permanent. Higher managerial ownership after the IPO is favorably priced in the markets.