Date of Award

1-1-1996

Document Type

Thesis

Publisher

Edith Cowan University

Degree Name

Master of Business

School

School of Business

Faculty

Faculty of Business

First Supervisor

Associate Professor Collin Dolley

Abstract

Information asymmetry about the value of the firm making initial public Offering and the potential investors exists. This thesis investigates whether issuers of initial public affairs (IPOs) use accounting discretion to increase the reported earnings through the choice of accounting methods. Anecdotal evidence •suggests that accounting numbers are used in the pricing of IPO. Further, there is an economic incentive for issuers of IPOs to sell the offering shares at the highest possible price which in tum increases their proceeds and thus their wealth. This suggests a prediction that, immediately prior to the offering, issuers exercise accounting discretion to increase the reported earnings. Two previous studies based on the U.S. IPOs provide conflicting findings. Aharony, Lin, and Loeb (1993) do not find evidence of earnings management prior to the offering, whilst Friedlan (1994) reports strong evidence that, prior to taking their firm public, issuers select accounting choices that increase the reported earnings. This study investigates earnings management by Indonesian IPO firms. Two Issues are addressed in this study. The first issue relates to investigation of earnings management in the period prior to the offering. The second issue relates to investigation of earnings management in the year after the offering. Tests are conducted on a sample of 6 firms from seven industries listed on the Indonesian stock market that went public from July 1991 to December 1994. The Indonesian stock market is an emerging market, which, in many respects has considerably different characteristics, such a lack of sufficient flow information, lack of detailed accounting regulations, and lack of market regulations, issuers have stronger incentives to exercise accounting discretion prior to the offering as reflected in the financial statement disclosed in the prospectus. The model used to test earnings management is based on Friedlan (1994). The results sho acceptance of the null hypothesis that issuers of Indonesian IPOs do not make income increasing discretionary accruals in the period before the offering. There is also no indication that firm size, firm growth, firm financial leverage, and level of retained ownership are associated with earnings management. An examination of the possible occurrence of earnings management in the period after the offering, finds that issuers make income increasing discretionary accruals in the year after the offering. Results based on other earnings management model do not provide materially different results.

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