Behavioral theories and the pricing of IPOs' discretionary current accruals

Abstract

The main purpose of this paper is to provide additional evidence about the effect of discretionary current accruals on the pricing of IPOs. This paper seeks to discriminate between two alternative explanations for the prior findings: (1) behavioral biases coupled with limited arbitrage; and (2) the sample- and period-specific nature of the results in the prior literature. The IPOs from 1962 to 1998 were used to obtain the following results. First, there was not a negative association observed between discretionary current accruals and subsequent price performance for the 1926-1971 period. Second, analysis reveals that the pattern of cross-sectional evidence is inconsistent with the predictions made by behavioral theories. Third, in the 1972-1998 period, evidence of predictable negative performance attributable to IPO discretionary current accruals is limited to NASDAQ firms. These findings are difficult to reconcile with the explanation of behavioral biases coupled with limited arbitrage. © 2010 Springer Science+Business Media, LLC.