Managerial Stock and Option Holdings and Fraudulent Financial Reporting of IPO Firms

I examine whether managerial stock and options holdings influence the propensity of goingpublic 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. These preliminary results suggest that more stock option grants in the pre-IPO period may encourage managers to distort financial information during the IPO process. Overall, the evidence in this paper contributes to our understanding of the relation between managerial equity incentives and actions of managers that may affect the quality of reported earnings.