Insider R&D Manipulation Around IPOs
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Authors
Walker, Rosemary
Kwak, Sungkyu
Hull, Robert M.
Issue Date
2011-10-1
Type
Working paper
Language
en_US
Keywords
Insider trading in securities , Going public (Securities) , Initial public offering (IPO) , Research and development (R&D) , Research and development spending
Alternative Title
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.
Description
Citation
Publisher
Washburn University. School of Business