Does media tone influence pre-IPO earnings management? Evidence from IPO approval regulation in China

Unlike the reputation view on the governance role of the media, we propose that media coverage influences pre-IPO earnings management through the regulation mechanism. Using the Chinese initial public offering (IPO) approval regulation setting, we find that negative pre-IPO media tone is associated with lower abnormal accruals but with higher real transactions manipulation and total earnings management in IPO prospectuses. We also find that the media's effect is more pronounced when IPO firms face stronger regulatory scrutiny such as when they have no approval committee connections, no political connections, or no state ownership. Further, we find that the effect of media tone is stronger when the media outlet has high circulation or high credibility. Our findings suggest that, in a highly regulated market, the media plays a limited governance role because, although it has the effect of restraining accruals management, this effect is substituted with more real transactions manipulation to reduce the risk of being punished by regulators.