Purpose – The purpose of this paper is to examine the effects of R&D manipulation on stock valuation for periods around IPOs. Insider manipulation is the difference in actual R&D change minus predicted R&D change where a negative difference indicates R&D underinvestment. Design/methodology/approach – This study is designed to build on prior IPO research that has found reduced R&D expenditures when insiders lower their ownership. The paper derives an R&D manipulation variable that measures underinvestment in R&D. This variable is used in a regression methodology to test its influence on: IPO stock valuation at various points in time and post-IPO price changes relative to the offer price. Findings – The paper discovers that greater underinvestment in R&D is associated with greater values during the IPO stock valuation process. This association is reversed when the paper looks at short-term valuation based on market prices. Only for bubble period IPOs do the paper finds poorer valuations for the long-term. Larger insider ownership decreases lead to poorer valuations regardless of the period of occurrence. Greater R&D underinvestment and insider ownership decreases both lead to less underpricing. Research limitations/implications – Like prior research, the paper assumes that knowledge about the change in R&D is known at the time of the offering. Interpretations for long-run results can be tenuous due to unexpected changes that occur over time. Practical implications – Investors should note that managers are able to set higher offer prices when they inflate earnings by underinvesting in R&D. Buying at an inflated offer price with R&D manipulation leads to losses in the aftermarket with these losses associated with IPOs that occur during a bubble period. Social implications – Misrepresentation during the IPO valuation process affects those who buy shares at inflated prices. This raises ethical questions about the behavior of those involved in the issuance process. Originality/value – This study is unique in testing how R&D manipulation and changes in insider ownership proportions impact the: IPO valuation process, post-IPO valuation, and changes in the stock price over time relative to the offer price.
