Management behaviour and market response

We study the relationship between management behaviour and the subsequent market response in the German IPO market. When applying two forms for earnings management, issuers that overperform in the long run manage earnings less aggressively. Over shorter measurement horizons, however, the performance is sensitive to the starting date of the measurement period. The market takes a considerable time to respond to the fundamental message conveyed by management behaviour towards earnings management at the time of the IPO. Within the first four months, IPO returns are essentially driven by factors other than fundamentals. This sheds light on the dynamics of IPO performance and the efficiency of the IPO aftermarket.