Auditor choice, retained ownership, and earnings disclosure for IPO firms: Further evidence

Abstract

Purpose

The purpose of this research is to provide further evidence on the association between the IPO signaling mechanisms (i.e. retained ownership, auditor choice, and earnings forecast) by using a less restrictive sample and by performing additional empirical tests.

Design/methodology/approach

Single equations are used as the baseline approach to estimate the three models. In addition, Copley and Douthett's 2002 simultaneous equation systems are applied to examine whether the results remain the same. Moreover, ranked values of the risk proxies of IPOs are derived and general least squares are run on these ranked variables.

Findings

Findings indicate that auditor reputation and retained ownership are not substitute signals. It is observed that as firm risk increases, entrepreneurs are more likely to retain higher ownership to signal firm value. In addition, contended that positive earnings disclosure before IPO is not associated with retained ownership in a significant manner. An analysis of the economic implication of the results suggests that findings are more representative.

Research limitations/implications

In this study the risk measures used (as well as those used in other studies) may not adequately proxy for offering firm risk. Additionally, the sample is restricted by missing values of the retained ownership variable. Further study can expand the sample using retained ownership obtained from other data sources. A study employing alternative approaches to control for the supply‐side effect of firm risk could be also productive.

Practical implications

Findings are of particular interest to firms that are planning to go to the public. They need to evaluate the benefit and cost of selecting a particular information system in signaling firm value to the market.

Originality/value

Using a larger sample, comprehensive testing periods, and ranked risk proxies contribute to the literature on evaluating singling mechanisms of IPOs.

Citation

Wang, K. and Iqbal, Z. (2006), "Auditor choice, retained ownership, and earnings disclosure for IPO firms: Further evidence", International Journal of Managerial Finance, Vol. 2 No. 3, pp. 220-240. https://doi.org/10.1108/17439130610676484