Abstract
This paper constructs models to examine the relationship between the probability of auditor litigation, earnings management, an IPO underpricing anomaly in the initial public offering context. This paper contributes to the literature in the three ways. First, this paper examines the relationship between auditor litigation and earnings management in the IPO market. The IPO context provides an ideal setting for testing both earnings management and auditor litigation because several unique features related to the IPO market provides exceptional incentives and opportunities for earnings management. Second, this paper proposes three different earnings management measures to test the relationship between auditor litigation and earnings management. In the absence of a perfect earnings management measures, the employment of three different measures may explain the inconclusive results from prior studies. Third, this paper makes the first attempt to propose that there is a positive relationship between auditor litigation and IPO underpricing.