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

Neil Bhattacharya
Southern Methodist University

Elizabeth Demers
INSEAD

Philip Joos
Tilburg University

Abstract: Although history is replete with patterns of innovative industries experiencing rapid proliferations of new entrants followed by extensive firm failures, the most recent Internet bubble remains a puzzle. Critics have claimed that poor accounting contributed to the excesses of the 1990s bull market. We address the question of whether investors could learn from history to use accounting and other information to better assess the failure risk of IPO firms in revolutionary technology industries. We develop parsimonious IPO failure prediction models using the failure experience of IPO firms that utilize innovative ideas or technologies, and generate out-of-sample forecasts of shakeout firms in two recent revolutionary technology industries: PC and Internet. Our prediction model outperforms a widely accepted generic model and generates significant negative (positive) abnormal returns for firms that are characterized as having high (low) ex ante failure risk.

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