Income management after initial public offerings

This paper examines earnings management during the underwriter-imposed lock-up period immediately after an IPO. It predicts and finds the use of income increasing accruals during the lock-up period. A sample of 190 firms having IPOs in 1995 and a sample of matching control firms are selected. Using the Modified-Jones, the Hribar/Collins and the Healy definitions of abnormal accruals, earnings management during the lock-up period is demonstrated. The paper also examines the effect of another suspected earnings management vehicle during this period, the valuation allowance under FAS 109.; This study contributes to the literature in that it extends Miller and Skinner to the post IPO lock-up period. It indicates an accounting driven earnings management explanation of the post-IPO behavior observed by Teoh et al. (1998) and Ritter (1991). In extending Miller and Skinner (1998) the study provides a strong test of the deferred tax asset valuation allowance as an earnings management tool in an environment in which earnings management is demonstrated. I find that the valuation allowance is not a component of earnings management and that the valuation allowance bears an inverse relation to income from operations.