Earnings Management in IPO: A Look at Public Float

Abstract

"[Purpose]This study investigates the effect of public float on earnings management. [Methodology]We measure public float by adopting Intintoli and Kahle (2010). Public float is defined as the market value of all common equity held by non－affiliates. We measure earnings management by calculating discretionary accruals in Jones (1991) and performance－matched discretionary accruals in Kothari et al. (2005). [Findings]Using a sample of initial public offering firms in United States from 1990 to 2015, we find that public float significantly reduces earnings management, supporting the monitoring theory. Evidence is consistent when we control for other variables that influence earnings management and absolute values of discretionary accruals are used. [Implications]Our study contributes to the literature in three ways. First, this study contributes to public float literature by showing the significant and negative effect of public float on earnings management. Second, this study supports the monitoring role of public float, whereas prior studies found support for a negative view of public float. Third, our findings complement the growing number of studies about the importance of public float and IPOs. "