The main purpose of our article was to prove the existence of upward earnings management in Russian companies around IPOs. As a result, we confirmed that the Russian companies around IPOs are generally engaged in Accrual Based Earnings Management. We found no signs of the importance of state control at Earnings Management levels around the IPO.
In our research we are interested in finding out whether Russian firms are influenced to change their Earnings Management from an IPO perspective. Through Earnings Management, the firm can target a specific period of time where it needs to change the perception of market players. Our paper will show whether Earnings Management in Russian firms has naturally increased by the fact of the proximity of the IPO.
9 Our main goal is to prove the existence of upward earnings management in Russian companies around IPOs. At the same time, we also want to analyze the Earnings Management surrounding IPO in more depth.
THEORETICAL BACKGROUND OF EARNINGS MANAGEMENT
Definition and types of Earnings Management
Another classification is presented in the chapter Definition of profit management in the book "Profit Management" (Ronen, J., and V. This classification is contrary to the previous one, specifically includes fraudulent actions in the process of defining profit management. Profit management is the choice of accounting policies with side of the manager or actions that affect profit in order to achieve.
This discussion will primarily concentrate on the difference between two main types of earnings management - accrual earnings management and real earnings management. This definition is consistent with that of Roychowdhurry, the creator of the most established model for assessing Real Earnings Management (2006). Accrual Based Earnings Management is defined by Joosten (2012) as a change of accruals to achieve the relevant level of income.
Accrual Based Earnings Management, on the other hand, uses different accounting methods and know-how to change financial results. In this way, our research does not deviate from the commonly used definitions of Accrual Based Earnings Management and Real Earnings Management.
Motivations for Earnings Management
At the same time, the authors argue that the personal benefit a director can achieve is not a crucial factor with regard to Earnings Management. Cash Accounting” (Goel 2016) aims to demonstrate that the motivations behind Earnings Management that influence the market's view are indeed justified. In this way, the fact that the market prefers reporting that includes accruals (income statements and balance sheets) and uses this data in investment decisions motivates companies to pay more attention to Accrual Based Earnings Management.
These findings help explain the declining earnings management seen in our bottom line. Therefore, in our research we will have to consider tax and political motives for downward earnings management as the main ones. The author specifically focuses on the fact that executive managers are very likely to engage in earnings management for their own benefit.
In this way, the article also proves that Earnings Management can actually affect the share price. This article proves once again that earnings management is indeed a viable tool to change the market perception of the company.
Earnings Management around IPO: what influences it and how to measure it
They believe that the timing of earnings management in the context of the IPO process is crucial. This shows that it is highly likely that the Russian firms will also have upward earnings management around times of IPO. One of the more technical works is the «Detecting Earnings Management» by Dechow, Sloan and Sweeney (1995).
This article concentrates on the comparison of different models for the assessment of Accrual Based Earnings Management and the findings of the authors can be used directly in our research. And the authors do indeed succeed in proving that earnings management does exist in companies in developing countries that face the listing procedures. In contrast to the previous article, this work examines the firm's performance in Earnings Management specifically during hardship.
In this way we can see that there is evidence for the importance of listing at the Earnings Management level. It is pointless to try to tell the difference between the chosen currency in the context of Earnings Management. H2: Companies listed on markets outside Russia will be less involved in earnings management.
The authors found that companies that have public involvement in their operations tend to have lower degrees of earnings management. Although we would still believe that the overall effect of government ownership will result in reduced earnings management. Our work, due to the peculiarities of the Russian market, cannot simply ignore the influence of a firm's political connections on the level of earnings management around IPO.
All the discussed features of emerging markets were directly related by the authors to Earnings Management and we should also consider them when analyzing the Russian market. We analyzed different interpretations of the definitions of Earnings Management and formulated the one that is most applicable for the purpose of our research. EMPIRICAL ANALYSIS OF IPO EARNINGS MANAGEMENT This part of our work is devoted to practical analysis.
EMPIRICAL ANALYSIS OF EARNINGS MANAGEMENT AROUND IPO
Research methodology
The next step will be to find the field of Real Earnings Management (REM). Here we should emphasize that this model serves as a supplement, aimed mostly at the third hypothesis that compares the choice of earnings management method by government-related firms. The residual values in the two models used represent the degree of each particular type of Earnings Management.
Positive values are associated with actions aimed at upward earnings manipulation, while negative values are associated with downward earnings management. These notions are contrary to the scope of our research, as such foreign firms comply with the financial laws of other countries and also benefit from the protection of foreign investors, so levels of earnings management will not be representative of those of developing country firms. This is especially true when analyzing earnings management around IPOs, as companies may attempt to manipulate earnings in certain quarters and these actions will not be captured by an analysis of annual data alone.
We decided to include the post-IPO period to compare the results and see if there is statistical reason to suggest that there was indeed earnings management around the IPO. This was done for the reasons associated with the formulas used to estimate earnings management proxies - these formulas require the use of lagged variables, for example 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠𝑡 - 1 or even ∆𝑆𝑎𝑙𝑒𝑠𝑡 - 1. We decided not to include minus 6 .period coming from ∆𝑆𝑎𝑙𝑒𝑠𝑡−1 (which requires at least two previous periods to be calculated) as this variable is only present in the Real Earnings Management model of Roychowdhury and this model is not at the center of our research – it is only used in the 3rd hypothesis, which compares the levels of Accrual Based Earnings Management and Real Earnings Management in the state-controlled companies.
We will look at whether the firm is indeed increasing its earnings management in two main ways: by comparing its earnings management levels around IPO with those the firm had after and by comparing company earnings management levels around IPO with its peer companies. Such a procedure as peer analysis is the common one in the Earnings Management research sphere. Stata package allowed the use of "predict "varname", residuals" command, which represents the residuals of the regression, which in our case represent the Earnings Management proxies for both the Wash-Based Earnings Management and Real Earnings Management.
The part of our work regarding the fact how to assess the Earnings Management was not complex relative to the other aspects of the research. The models for assessing the Earnings Management proxies will be represented by Modified Jones Model and Roychowdhurry Model. As mentioned by other authors, it is difficult to analyze Earnings Management in developing countries, which was unfortunately also true for our work.
The analysis of the results
These results indicate that real earnings management practices are much less popular in the Russian case. Further stages of the analysis of the results will also highlight the prevalence of Accrual-Based Earnings Management in Russian firms. Incremental Earnings Management in the Russian case still exists, but is tied to specific events and short-term goals of the company.
We can also note that companies in the IPO quarter exhibited lower levels of earnings management compared to the quarter immediately preceding it. In addition, companies may be afraid to exhibit Earnings Management so close to the end of the IPO process. At the same time, the difference between the degrees of Accrual Based Earnings Management compared to the companies' peers is even greater.
Throughout the period, earnings management levels in the companies pursuing the IPO appear to be declining. In this way, we cannot say that the state-owned companies show higher levels of real earnings management. This in turn leads to the non-detection of the Earnings Management or its detection in the much later period.
In our work we were concerned with the analysis of Earnings Management in Russian firms around IPO. We were able to prove that Russian firms around the IPO do indeed engage in incremental Earnings Management. Through our analysis they can see that the Russian market is characterized by higher levels of Earnings Management around IPOs.
