Poison pills adoption, real earnings management and IPO failure

Abstract

PurposeThis paper examines the relationship between poison pills, real earnings management and initial public offering (IPO) failure.Design/methodology/approachThe authors sampled 2,997 IPO firms that went public during 1993-2015.FindingsThe authors find that IPO firms manipulate earnings upward using real earnings management. The authors also find that IPO firms exhibiting a higher level of real earnings management have a higher probability of IPO failure. In addition, the authors find that weak shareholders' governance is positively associated with IPO failure.Practical implicationsThese results suggest that poor governance structures in failed firms open the door to manipulating real activities and increasing operational risk.Originality/valueThe study findings are of most significant interest to potential investors and other stakeholders affiliated with a firm going public, an auditor, an underwriter, the lawyers who consult with the firm and employees or executives who might consider joining that firm.