Association of Earnings Management before IPO and Stock’s Returns with Investors Sophistication as Moderating Variable

Hubungan Manajemen Laba Sebelum IPO dan Return Saham dengan Kecerdasan Investor sebagai Variabel Pemoderasi

Association of Earnings Management before IPO and Stock’s Returns with Investors Sophistication as Moderating Variable

Joni dan Jogiyanto H. M.

Abstract

The major purpose of this study is to investigate association between earnings management before Initial Public Offerings (IPO) and stock’s returns with investors sophistication as a moderating variable. Institutional ownership is used to proxy investors sophistication.

The JSX’s IPO companies from 1990 to 2002 were used as samples. The first sample was 75 companies which institutional ownership ≥ 40% and the second was 63 companies that institutional ownership ≥ 60%. Instrumental Variable Approach (Kang and Sivaramakrishnan, 1995) was used to detect earnings management.

This study provides an evidence that issuers report unusually high earnings management around IPO (two years before and five years after IPO). Issuers used mean reversing strategy in two years before IPO period (income decreasing) for preparing earnings management in the next period (income increasing). Furthermore, this study documented a negative association between earnings management and stock’s returns with investors sophistication as moderating variable. One interpretation of this finding is that high earnings management has substantial stock’s returns consequences when investors sophistication factor was taken into account. This finding is consistent with the prior research developed by Balsam et al., 2002.


Key words: IPO, Earnings Management, Instrumental Variable Approach,
Stock’s Returns, Investors Sophistication.


LATAR BELAKANG
Some studies find that firms manage earnings prior to the IPO. Friedlan (1994) found evidence that firms in the United States to increase accounting earnings period of one year before the IPO. Jain and Now (1994) states that there is reduction in the operational performance of the company after the IPO. The decline is showing indications of earnings management has occurred before the IPO. Teoh et al. (1998a) found that there are companies that behave aggressively (increase profits) and there are behaving conservatively when preparing financial statements of one period before the IPO.

Imam Sutanto (2000), Gumanti (2001), Syaiful (2002), and Raharjono (2005) finds that earnings management occurs ahead of an IPO on the Jakarta Stock Exchange (JSE). Gumanti (2001) and Syaiful (2002) concluded that management conduct of management earnings period of two years before the IPO and there was no indication of earnings management period of one year before the IPO. While Raharjono (2005) find that earnings management occurs in period one year before the IPO.

(Simposium Nasional Akuntansi 11)

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