Managerial equity incentives and financial misreporting of IPO firms

I examine whether managerial stock and options holdings influence the propensity of going-public firms to manipulate financial information, as measured by the incidence of shareholder class action lawsuits and discretionary accruals. Examining a sample of U.S. firms that went public during the years 1996-2006, I find some evidence that firms in which top managers receive large stock options grants prior to the IPO are more likely to face class action lawsuits and have higher issue-quarter discretionary accruals. In contrast, I find that share ownership of top executives is negatively related to the incidence of lawsuits. Overall, the evidence in this paper contributes to our understanding of the relation between stock and options holdings and incentives of managers to engage in costly manipulation of financial information during the IPO process.