Earnings Management Around IPOs in Hot and Cold Markets: Evidence on Long-Run Performance from Sweden, 1990-2025

Sammanfattning

The long-run underperformance of IPO firms remains one of the most debated puzzles in financial markets. Prior research links this pattern to both earnings management around the listing and market timing during periods of strong investor sentiment, but these explanations are often studied separately. Building on agency theory, information asymmetry, capital market timing theory, and Lin et al. (2021), this thesis examines Swedish IPOs from 1990 to 2025 to assess whether firms exhibit income-increasing discretionary current accruals, whether this differs between hot and cold markets, and whether it relates to long-run performance. The study estimates discretionary current accruals using a modified Jones-type model and measures three-year buy-and-hold abnormal returns against both the SIX Return Index and matched firms. The findings provide qualified evidence of income-increasing accruals in the IPO fiscal year, but do not show that hot-market IPOs engage in more aggressive earnings management. Instead, long-run underperformance is concentrated among firms going public in hot markets, regardless of earnings-management classification. Overall, earnings management appears relevant but conditional, while market sentiment plays a more central role in explaining long-run IPO performance in Sweden.