Insider R&D Manipulation Around IPOs

Abstract

We examine 447 IPOs from 1997-2005. While our regression model builds on prior research, it uses a more inclusive dependent R&D variable, a wider range of insider variables ("net" selling, changes in ownership proportions, and a five percent group), and independent variables designed to test the earnings fixation hypothesis. We find that reduced R&D spending is associated with insider behavior related to the lowering of ownership proportions and greater net share selling. This finding strengthens prior IPO research conducted on a smaller sample and an earlier period that did not cover both a bubble and a non-bubble period. Our insider results are driven by directors and officers and not other insiders who own give percent or more of shares. Because our insider variables are unrelated to changes in capital expenditures, our findings support the earnings fixation hypothesis that posits insiders reduce R&D to inflate earnings when it enhances their wealth.