Earnings management behavior of the initial public offering (IPO) firms during pre-IPO, IPO, and post-IPO years: Evidence from the Casablanca Stock Exchange

This paper examines the pattern of earnings management around the IPO year in Morocco during the period between 2001 and 2007. Our results show that earnings management reaches its maximum level during the year of an IPO followed earnings management during the pre-IPO years and the post-IPO years. We argue that the need for making reputation as a profitable firm induces management to managing earnings during the pre-IPO years. This need to manage earnings is the most during the year of an IPO because announcing earnings that are lesser than the previous years would hurt the reputation of a firm in the eyes of potential investors/shareholder and would reduce the offering proceeds. However, as firm enters the post-IPO years, lower requirements of raising capital in immediate future along with greater scrutiny from stock market participant’s result in lower incentives to manage earnings.