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Earnings management before IPOs: Are institutional investors misled?

Date: Tuesday, June 21st, 14:00--15:30

Location:D207, Tong Bo Building, Liu Lin Campus

The public lecture

Given by

Professor: Kam C. Chan

Western Kentucky University

About the lecturer:

Kam C. Chan is the Leon Page Chair of Finance and a University Distinguished Professor. He received his B.Soc.S degree in economics at Chinese University of Hong Kong (1984), M.A. in economics (1987), M.A. in finance (1989), and Ph.D. in finance (1990) at the University of Alabama. His teaching interests are investments and international finance. Research interests include derivative securities, mutual funds, fixed income, and measurement of intellectual contributions. 

He has published more than 140 journal articles in leading finance and business journals such as Accounting and Business Research, Accounting and Finance, Accounting, Organizations and Society, Australian Accounting Review, Family Business Review, European Financial Management, Financial Management, Financial Review, International Business Review, Journal of Banking and Finance, Journal of Business Ethics, Journal of Business Research, Journal of Corporate Finance, Journal of Empirical Finance, Journal of Financial Education, Journal of Financial Research, Journal of Futures Markets, Journal of International Business Studies,  Journal of Portfolio Management, Journal of Real Estate Research, Real Estate Economics, Review of Quantitative Finance and Accounting, among others. 

He held tenured faculty positions at the University of Dayton, the University of Wisconsin-Parkside, and Minnesota State University Moorhead before he joined WKU in 2003. He is also a Chartered Financial Analyst (CFA) charter holder and was a director of Midwest Finance Association (2004-2007). He won the College public service award in 2007, College research award in 2005, 2008, and 2010, the Vitale Award for Innovation, Initiative, and Leadership in 2008, and awarded a University Distinguished Professor in 2013.  He is currently an associate editor of Chinese Economy and Journal of Financial Education, and on editorial board of several journals. 


While the literature generally contends that investors as a whole are misled by firms’ earnings management before initial public offerings (IPOs), it does not distinguish institutional from individual investors. We argue that institutional investors have better ability to recognize earnings management and adjust accordingly. Given the required disclosure of institutional investors’ bidding data during IPO bookbuilding, we use a sample of Chinese IPOs to test our hypothesis. Our findings suggest that institutional investor IPO bid prices are negatively correlated with earnings management. The findings are robust to a battery of different specifications. In contrast, we document that individual investors’ oversubscription ratio is positively correlated with IPO firms’ real earnings management. Additional results show that IPO offer prices (relative to the proposed IPO price range) are negatively correlated with earnings management, suggesting that institutional investors’ ability to recognize earnings management pressures IPO issuing firms into setting a lower offer price.

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