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

Yan Cao
Cornerstone Research/ University Of Rochester

Abstract: Previous research posits that in an equity carve-out, a subsidiary’s shares are issued via an IPO to reduce the inefficiency in the subsidiary's corporate policies, to maximize the sale proceeds the parent obtains, or to mitigate the parent’s financial constraint. I find that, in contrast to the documented positive abnormal accruals around IPOs, the pre-issue abnormal accruals of the carved out units are negative and lower than those of the industry peers. Also, pre-issue abnormal accruals tend to be lower if the unit is later sold to a corporate buyer or if the unit managers are granted higher equity pay upon IPOs, whereas accruals tend to increase with the parent’s financial distress. Overall, the results suggest that carve-outs,only a subset of IPOs, are linked with multifaceted incentives that impact accounting choices in different ways. In sum,the results suggest that the issue of how IPOs motivate discretionary reporting seems to be oversimplified in existing research.

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