Initial public offerings (IPOs) are one of the most important events in a firm’s lifecycle, often representing its first major interaction with public capital markets. To assess value, evaluate risks, and determine offering terms, investors, underwriters, auditors, and regulators all rely heavily on the financial statements firms disclose before going public. Yet little is known about how often those pre-IPO financial statements later prove to be misstated, or what such misstatements reveal about reporting quality during the IPO process.

In a new study, we address this knowledge gap by examining the incidence and implications of restating pre-IPO financial statements. Using a comprehensive sample of 1,922 IPOs in the U.S. from 2002 to 2023, we identify 156 cases in which firms restated the pre-IPO financial statements. Of these, 41 restatements were detected and disclosed during the IPO registration process, while 115 were announced after the firm had already completed the offering and begun trading in the public markets. This evidence suggests that the IPO process provides an opportunity to identify and correct misstatements before firms list, but that a substantial number of issues still surface post-IPO.

These patterns speak directly to a longstanding debate in the IPO literature: Do IPO firms engage in earnings manipulation before going public, as evidenced by prior research documenting abnormally high discretionary accruals during IPO years? Or does the intensive oversight of auditors, underwriters, legal counsel, and the SEC constrain such behavior? Because accrual-based measures alone cannot disentangle opportunistic reporting from normal economic activity, especially in young and fast-growing firms, restatements offer a powerful way to shed new light on this question.

IPO Firms Are Less Likely to Misstate Financials Than Public Firms

To evaluate which side of the debate is better supported by the restatement data, we compare the likelihood of post-offering restatements between IPO firms and seasoned public firms. Our analysis shows that the IPO process meaningfully improves reporting quality: IPO firms are less likely to announce post-offering restatements than comparable public firms, contradicting the pervasive misreporting view that predicts widespread earnings manipulation before a firm goes public. This pattern is robust across multiple research designs, including a propensity-score-matched sample and bivariate probit models that separate the occurrence and detection of misstatements.  Taken together, these findings suggest that the elevated accruals documented in prior studies may often reflect the underlying economic fundamentals of young, high-growth firms navigating the transition to public markets, rather than widespread opportunistic earnings manipulation.

Observable Indicators of Reporting Risk

Although IPO firms are less likely to misstate overall, a meaningful minority of firms pass through the IPO review process yet later restate their pre-IPO financials after going public. To better understand these residual reporting failures, we compare IPO firms that subsequently restate with those that do not, assessing whether observable pre-IPO characteristics signal elevated reporting risk and whether capital market participants respond to these risks. We find that IPO firms that later restate exhibit several indicators of reporting risk even before going public.

1. Higher Discretionary Accruals: Restating IPO firms exhibit significantly higher discretionary accruals in the pre-IPO period than IPO firms that do not restate. This pattern indicates that althoughthe IPO process improves financial reporting quality overall, a subset of firms still manages to complete the offering with misstated financials, and these misstatements manifest in unusually high accrual levels.
2. Higher Underwriter Spreads: Restating IPO firms pay significantly higher underwriter spreads than IPO firms that do not restate. This pattern indicates that underwriters perceive elevated reporting risk at the time of the offering, and this perceived risk is reflected in higher compensation even before the misstatements become publicly disclosed.
3. Higher Audit Fees: Restating IPO firms also incur higher audit fees than non-restating IPO firms. This pattern suggests that auditors detect greater reporting complexity or heightened risk during the pre-IPO period, and these concerns translate into higher audit pricing despite the misstatements not yet being disclosed.
4. Greater IPO Underpricing: Restating IPO firms experience significantly greater underpricing on the first day of trading compared with IPO firms that do not restate. This pattern indicates that investors apply a deeper discount at issuance due to unresolved information uncertainty, leading to less favorable offering outcomes for firms that later restate.

Overall, the evidence indicates that misstatements undetected during the IPO process carry early signals of reporting risk and impose substantial economic costs on issuers, manifested not only in subsequent restatements but also in higher issuance costs and less favorable offering outcomes.

Implications and Takeaways

Our study offers several important takeaways for researchers, practitioners, and regulators.

1. The IPO process largely mitigates misreporting concerns. Despite concerns that IPO issuers inflate earnings before going public, our analysis shows that IPO issuers are less likely to misstate their pre-IPO financials than seasoned public firms. This suggests that the IPO process plays an important role in improving financial reporting quality. This finding also implies that elevated accruals around IPO likely reflect underlying economic fundamentals rather than earnings manipulation.
2. IPO oversight is not sufficient to eliminate all reporting failures. A meaningful minority of IPO firms still restate their pre-IPO financial statements after going public, indicating that even intensive scrutiny cannot detect all material issues. Regulators and investors should recognize that the IPO process substantially reduces misreporting but does not fully eliminate it.
3. Residual misstatements leave observable signals and impose real economic costs. For the subset of IPO firms that ultimately restate, we observe identifiable indicators of reporting risk, such as higher discretionary accruals, and associated economic consequences, including higher underwriter and audit fees and greater IPO underpricing. These findings imply that capital market participants partially infer reporting uncertainty even before misstatements are officially revealed, leading to higher issuance costs and less favorable pricing outcomes for issuers.
4. Restatements offer a powerful alternative to accrual-based proxies. Unlike discretionary accruals, restatements directly reflect material misstatements and do not depend on assumptions about normal business conditions. Our evidence highlights the value of restatement-based evidence in clarifying longstanding debates about IPO earnings management and strengthens the tools available to research financial reporting quality.

Conclusion

By examining restatements of pre-IPO financials, we provide new evidence that contradicts the pervasive misreporting hypothesis in IPOs and underscores the role of the IPO process in improving financial reporting quality. Yet our findings also show that residual misstatements persist, and capital markets impose real costson firms whose reporting bypasses IPO oversight.

Youngki Jang is an assistant professor of accounting at the University of Delaware, and Jung Eun (JP) Park is an assistant professor of accounting at New Mexico State University. This post is based on their recent article, “Financial Reporting Quality Around Initial Public Offerings: Evidence from Misstatements of Pre-IPO Financials,” available here.