Earnings management in the post‐IPO years and their impact on the long‐run stock performance of foreign versus domestic IPO firms

Using a matched sample of foreign and domestic IPO firm listings on US stock exchanges, we find that foreign IPO firms are associated with significantly higher upward earnings management via discretionary (abnormal) long‐term accruals in the first 2 years post‐IPO year, and lower long‐run stock returns in the 3 years post‐listing, compared to US domestic IPO firms. Our results also show that the lower long‐run stock returns of foreign IPO firms are associated with their higher discretionary long‐term accruals. We provide further evidence that institutional investors can mitigate lower long‐run stock returns of foreign IPO firms compared with US domestic IPO firms.