An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Sharon P Katz
Columbia University

Abstract: This study explores the change in earnings management and conservatism as firms transition between private and public ownership. Using a unique sample of U.S firms, a private phase, in which firm equity is privately held while firm debt is publicly held, is compared to a public phase, in which firm equity is also publicly held. Evidence consistent with upward earnings management in the year of initial public offering, downward earnings management prior to management buyouts, and upward earnings management prior to leveraged buyouts is found. The study also finds that during the public phase, firms engage in greater upward earnings management to avoid small earnings decreases and recognize losses in a more timely manner. Furthermore, this study finds evidence that private-equity-backed private firms engage less in upward earnings management, and recognize losses more promptly, than do non-private-equity-backed private firms.

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