However this article mentioned that most investors

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case, investors should be rationally suspicious. However, this article mentioned that most investors are either ignorant of academic research on long-term IPO underperformance or choose to act in an irrational manner. - Positive accounting theory predicts that managers have incentives to overstate earnings to paint rosy pictures about firms’ future prospects when their personal wealth is associated with earnings. Facebook’s executive team retains a significant portion of common shares and has incentives to inflate reported earnings. Indeed, research has found that excess accruals are abnormally high around IPO. And greater amount of excess accruals is associated with higher likelihood of poor future performance. - Moral hazard and agency theory are relative here too. Once the owner manager sells part of his ownership to outsiders, he will have incentives to take more perks and not work as hard. Directly monitoring is not feasible. If investors anticipate the worst, they will discount the future cash flow of the firm. Consequently, some firms will explicitly commit to more conservative accounting practices to restrictive their discretion. One article on CFO reports that Facebook appears to be staying conservative in its accounting choices as compared with a few most recent IPOs. For example, investors questioned Groupon’s use of non-GAAP numbers and Zynga’s misleading “average daily bookings”. -An additional constraint on earnings management comes from reputational concerns. If firms plan to return to capital market for a seasoned equity offering, they are less likely to manage earnings during IPO.
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  • Winter '10
  • JennyZhang
  • FACEBOOK IPO article

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