EARNINGS MANAGEMENT AND THE LONG-RUN MARKET PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Issuers of initial public offerings (IPOs) can report earnings in exce ss of cash flows by taking positive accruals. This paper provides evid ence that issuers with unusually high accruals in the IPO year experie nce poor stock return performance in the three years thereafter. IPO i ssuers in the most ''aggressive'' quartile of earnings managers have a three-year aftermarket stock return of approximately 20 percent less than IPO issuers in the most ''conservative'' quartile. They also issu e about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifi cations.