THE INFORMATIONAL ROLE OF PRESTIGIOUS GATEKEEPERS UNDER DIFFERENT ECONOMIC CONDITIONS AND REGULATORY REFORMS: THE CASE OF THE IPO MARKET
Underwriters, industry specialist auditors, and credit rating agencies release valuable information about corporations’ value to the capital markets. Under the information asymmetry hypothesis, underwriters, industry-specialist auditors and credit rating agencies boost firm transparency and, hence, decrease the extent of informational asymmetries. Previous studies present evidence that managers tend to manipulate earnings around IPOs. If managers opportunistically manipulate earnings in the IPO year, the reported earnings will not be sustainable, and the IPO firms will exhibit negative abnormal stock returns in subsequent periods due to investors’ downward adjustment of their evaluation of the firm’s value. Therefore, in this thesis I aim to explore the potential effect of the presence of prestigious gatekeepers, namely the multiple lead underwriters (MLUs), industry specialist auditor (jointly city-national level) and, finally, credit rating on the level of earnings management around IPO and the managers’ choices of accrual-based and real earnings management. I employ the entire US common share IPO for the period from 2000-2014, and the results show that MLUs restrict accrual-based and real earnings management in terms of cashflow from operation (CFO). Consequently, firms have resorted to discretionary expenses manipulation. Meanwhile, industry-specialist auditors tend to restrict all forms of accruals-based and real earnings management. For credit rating I observe a negative and significant relation between the presence 3 of rating and accrual-based and sales-based manipulations, this, in turn, results clients engaging in a higher level of production-based earnings management. Another crucial phenomenon related to information asymmetry in the IPO market is under-pricing of newly issued shares. I investigate the effect of watchdogs, credit ratings and industry-specialist auditors on IPO under-pricing and how the different economic conditions affect the market assessment of their informational roles. I assess a sample of 1422 US common share IPOs from 2000-2014. When I investigate the market assessment of the gatekeepers’ informational roles, we split the sample into three different time periods, pre (2000-2006), during (2007-2009) and post (2010-2014) crisis periods. I observe that rated IPO firms, and industry specialist auditor clients’ firms, when going public, are significantly less under-priced than unrated/audited by non-industry specialist auditor firms. This finding holds for both, pre and post, sub periods for rated firms only and is consistent with the argument that credit ratings lower the level of the information asymmetry about the IPO firm’s value and information asymmetry between issuers and investors in the IPO market. However, there was no significant relationship during the crisis period. In the case of industry specialist auditors’ client firms, I observe that industry specialist auditors’ client firms, when going public, are significantly less under-priced than firms audited by non-specialist auditors. This finding holds only for the pre-crisis period and reverses in the subsequent periods. This can indicate that the market no longer values the industry specialists’ audits.