IPO profit guarantees and income smoothing

• Main Authors: Wan Hussin, Wan Nordin, Ripain, Noraizan
• Format: Article
• Language: English
• Published: Universiti Utara Malaysia 2003
• Subjects: HG Finance
• Online Access: http://repo.uum.edu.my/155/1/Wan_Nordin_Wan-Hussin.pdf; http://repo.uum.edu.my/155/; http://ijms.uum.edu.my
• Institution: Universiti Utara Malaysia

A unique feature of the initial public offering (IPO) market in Malaysia during 1996-1999 was the imposition of IPO profit guarantees for a three-year period subsequent to listing on the major shareholders of the newly listed Second Board companies. This study investigated the income smoothing behavior on a sample of 92 IPO companies with profit guarantees, of which 54 of them reported profit guarantee surpluses.For each of the companies, Eckel's income smooting Index (1981) is calculated based on two subperiods i.e.(1) ten-year period comprising five years before and five years after listing and (2)profit guarantee period.The evidence indicates that there is no significant difference in income smoothing between companies with IPO profit guarantee surplus and IPO profit guarantee shortfall for both sub-periods. We argue that the controlling shareholders need not resort to income smooting to avoid the costly profit guarantee shortfall as they could easily seek variations in the original profit guarantee agreement. Further analyses show that income smoothing is more prevalent among smaller companies and construction companies, based on a ten-year period but not the profit guarantee period.