Earnings Management for Second-time IPOs: Evidence from China

In China’s IPO market, firms that fail in their first IPO application make considerable adjustments before making their second IPO application. Examining firms that applied for IPOs during 2004-2018, we find that failed IPO applicant firms “package” themselves to obtain approval of the China Securities Regulatory Commission (CSRC) by reducing accrual earnings management and increasing real earnings management. In addition, after a successful second IPO application, these firms relax their vigilance vis-a-vis the CSRC and increase both accrual and real earnings management. This pre-IPO “packaging” behavior deceives investors, leading to higher IPO prices and higher post-IPO returns.