Does Debt-IPO by Privately-held Firms Trigger Financial Statement?

Publication Type

Conference Paper

Publication Date



We investigate financial statement management by privately-held firms that only issue debt in an initial public offering (debt-IPO firms). We examine whether, a-priori, managers manage financial ratios important to credit rating agency Standard & Poor’s, attempting to achieve a better credit rating (and presumably decreasing borrowing costs). To this end, we examine whether these ratios are consistently near the worse (better) end of a benchmark sample distribution for a particular credit rating category (e.g. AAA, BBB, etc.) depending upon whether managers’ efforts are (are not) successful in attaining a better credit rating. Only the debt leverage ratios are consistently worse. Examining both accounting earning management via accruals and earnings management via real economic actions for debt-IPO firms in the pre-and post-IPO filing years we find little evidence of financial ratio manipulation. Further, we find that Standard and Poor’s does not assign overly optimistic credit ratings to debt-IPO firms (relative to other firms with debt ratings), presumably to win new business. Financial statement management by debt- IPO firms appears to be contained to the amount of the debt issued, an easily managed and highly transparent activity. We conclude that our results are consistent with the conclusions of Ball and Shivakumar (2005, 2008) and Venkataraman et. al (2008) rather than prior widely cited literature on earnings management in equity-IPO firms (e.g., Teoh, Welch and Wong (1998) and Teoh, Wong and Rao (1998)). That is, firms initially going public with debt face similar demands for higher quality disclosure limiting potential earnings and financial statement management activities in the debt-IPO period.


Accounting | Corporate Finance | Finance and Financial Management

Research Areas

Financial Performance Analysis


Tel Aviv Conference in Accounting