Torpedo Your Competition: Strategic Reporting and Peer Firm IPO

We show that firms manage their earnings downwards when their industry peers file for initial public offerings (IPOs). The downward accruals reverse in a following period. This effect is stronger if peers poise a bigger threat to the incumbents, if industries are more competitive or informationally opaque, or if the incumbents are more long-term oriented. When incumbents engage in more aggressive downward earnings management, peer firms suffer from lower offer prices, raise smaller amount of capital, and are more likely to withdraw from the offering. They also invest less, hoard more cash, and experience lower profitability post IPO. Our results highlight the role of strategic reporting on product market competition. Endogeneity of goingpublic activity and choice of proxies for earnings management and industry classifications do not appear to drive our findings.