Management Quality and Operating Performance: Evidence for Canadian Ipos.

I. INTRODUCTION The performance of initial public offerings (IPO's) has been the subject of extensive scrutiny in the past two decades in the United States and in Canada (see, e.g., Ritter, 1991; Jain and Kini, 1994; Loughran and Ritter, 1995; Kooli and Sure, 2004; Carpentier and Suret, 2006). Several studies conclude that IPO firms underperform in the long-run. Indeed, Kooli and Suret (2004) find that 5-year cumulative abnormal returns (CAR) for Canadian IPOs issued during the period 1991-1998 range from: -11.02% to -20.65%. Various hypotheses have been advanced by researchers to explain this phenomenon including: (a) Investor exuberance: over-optimism regarding future earnings for newly listed firms leads to irrationally high stock prices. (b) Market timing: stock offerings are set to coincide with superior (though unsustainable) performance (see, e.g., Loughran and Ritter, 1995). (c) Earnings Management: firms use accruals to artificially enhance short-term earnings in order to boost stock prices, (see, e.g., Teoh et al., 1998a and 1998b).