Rachappa Shette, Sudershan Kuntluru and Sunder Ram Korivi
This paper aims to examine the impact of initial public offerings (IPO)-year opportunistic earnings management on long-term market and earnings performance.
Abstract
Purpose
This paper aims to examine the impact of initial public offerings (IPO)-year opportunistic earnings management on long-term market and earnings performance.
Design/methodology/approach
A sample of 150 book-built IPOs over 2001-2006 are analysed based on industry adjusted return on sales and industry adjusted return on assets for six post-IPO years. The quality of earnings is measured in two ways using discretionary accruals and Beneish manipulation score. Modified Jones model is used to estimate the expected accruals and to compute the discretionary accruals for each IPO firm year. Regression model is used to examine the impact of IPO-year quality of earnings on future earnings performance.
Findings
The paper finds that earnings and market performance of IPO companies are abnormally higher in the IPO-year, as compared to the post-IPO years. Similarly, the quality of earnings during the IPO-year is lower than those in the post-IPO years. The results also show that the opportunistic earnings management in IPO-year has significant negative impact on the long-term adjusted earnings and market performance.
Research limitations/implications
The present study is confined to the period from 2001 to 2006 for the purpose of post-IPO analysis for a period of six post-IPO years. Thus, the conclusions of this study are to be viewed with this limitation.
Originality/value
This paper is the first study based on the Indian context to examine the relationship between the quality of earnings of the IPO firm and long-term earnings and market performance.
Details
Keywords
Shagun Thukral, Sharada Sridhar and Medha Shriram Joshi
The paper aims to understand the factors that have limited the development of this market in India. With a conservative bank-based economy in the backdrop and with the Central…
Abstract
Purpose
The paper aims to understand the factors that have limited the development of this market in India. With a conservative bank-based economy in the backdrop and with the Central Bank pulling the strings, the sovereign debt market occupies the most space in the bonds universe of India. The latter and almost minuscule portion of this market is occupied by the corporate and industrial houses that have forayed into the market to raise finances. This has led to a cycle where lack of participation leads to lack of liquidity and underdeveloped rating mechanisms which further pressurizes the development of this market in India.
Design/methodology/approach
The paper is designed as a literature review which has attempted to identify the commonly agreed upon factors that have constrained the development of Corporate Bond markets in India especially and some other emerging economies who are successful or unsuccessful in their attempt to establish a corporate bond markets. These factors have then been categorized into broader heads and commented upon as a part of the analysis.
Findings
Corporate bond markets in India, although steadily progressing, is still impeded by the nature of the market itself. While the necessary steps have been taken to implement some of the recommendations by the Expert Committee, the response solicited has not quite been as expected. The poor liquidity, weak rating-mechanisms, absence of standardization and disclosure nomenclatures and illiquidity in the government bond market itself need to be addressed objectively.
Research limitations/implications
The research adopted attempts to validate prior research and the attempts by regulators to implement an action plan. However, further progress on the changing scenarios is encouraged to be tested through a quantitative analysis.
Originality/value
The government and the Central Bank have constantly emphasized the importance of developing the Corporate debt market. Several studies have attempted to analyze the factors that have crippled the growth and steps taken by the Central Bank and Securities and Exchange Board of India by appointing an Expert Committee. This paper has attempted to visit all these factors and analyze the attempts to overcome by the Expert Committee including the backdrop of other nations who have a vibrant corporate debt market today. It sets the tone for further quantitative or statistical analysis.