IPO Profit Guarantees And Income Smoothing

The imposition of Initial Public Offering (IPO) profit guarantees is widespread among companies that seek listings on the Second Board of the Kuala Lumpur Stock Exchange (KLSE). It is a unique feature of the IPO market in Malaysia during 1996-1999. Extending prior research on income smoothing, this study investigates 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 Smoothing Index (1981) is calculated based on two sub-periods: i.e. (1) ten year period comprising five years before and five years after listing, and (2) five-year period comprising one year before and one year after the profit guarantee period. Chi-Square and Kruskal-Wallis tests are used to test-i the association between the incidence of income smoothing and whether a company reported a profit guarantee shortfall or surplus. The evidence accepts the null hypothesis 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. In addition, the findings also indicate that income smoothing is not associated with factors such as company's sectoral
classification, type of auditor and year of listing.