Post-Initial Public Offering Earnings Management Driven by Insider Selling Motives: Using KOSDAQ Initial Public Offerings

This study examines whether initial public offering (IPO) managers overstate accruals before insider selling in order to gain profits from insider selling, and whether accrual inflations that are motivated by insider selling are pronounced when information asymmetry between managers and outsiders is high and managers have higher incentives to manage earnings. Furthermore, the study examines whether managers employ real activities management in addition to accrual management, and whether managers choose accrual management over real activities management, and vice versa. The results reveal that discretionary accruals are significantly positive in the year of the IPO (year 0) and in the year immediately following the IPO (year +1). However, discretionary accruals in only year +1 are positively related to insider selling by chief executive officers (CEOs) in year +2. This is due to the lockup provision that prohibits the largest shareholders of IPO firms from selling their shares for 2 years from the date of the IPO. Our findings also show that the CEOs of IPO firms are more likely to inflate earnings before insider selling when information asymmetry is high and when their incentives for earnings overstatement are high. We find that IPO managers engage in real activities management in addition to accrual management to inflate earnings before insider selling. In addition, real activities management is observed only when the magnitude of accrual management is low, indicating that the CEOs of IPO firms engage in real activities management when they are not flexible to manage earnings through accrual management.