Earnings management and the underperformance of seasoned equity offerings

Seasoned equity issuers can raise reported earnings by altering discretionary accounting accruals. We find that issuers who adjust discretionary current accruals to report higher net income prior to the offering have lower post-issue long-run abnormal stock returns and net income. Interestingly, the relation between discretionary current accruals and future returns (adjusted for firm size and book-to-market ratio) is stronger and more persistent for seasoned equity issuers than for non-issuers. The evidence is consistent with investors naively extrapolating pre-issue earnings without fully adjusting for the potential manipulation of reported earnings.

[1]  Siew Hong Teoh,et al.  Are Accruals during Initial Public Offerings Opportunistic? , 1998 .

[2]  S. Perry,et al.  Earnings management preceding management buyout offers , 1994 .

[3]  Kent D. Daniel,et al.  NBER WORKING PAPER SERIES EVIDENCE ON THE CHARACTERISTICS OF CROSS SECTIONAL VARIATION IN STOCK RETURNS , 1996 .

[4]  Patricia M. Dechow,et al.  DETECTING EARNINGS MANAGEMENT , 1994 .

[5]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[6]  Mark L. DeFond,et al.  Debt covenant violation and manipulation of accruals , 1994 .

[7]  R. Hansen,et al.  Corporate Earnings and Financings: An Empirical Analysis , 1990 .

[8]  Srinivasan Rangan.  Earnings around Seasoned Equity Offerings: Are They Overstated? , 1995 .

[9]  D. Spiess,et al.  Underperformance in long-run stock returns following seasoned equity offerings , 1995 .

[10]  E. Fama,et al.  Industry costs of equity , 1997 .

[11]  Tim Loughran,et al.  The Operating Performance of Firms Conducting Seasoned Equity Offerings , 1997 .

[12]  Tim Loughran,et al.  The New Issues Puzzle , 1995 .

[13]  J. Jones.  Earnings Management During Import Relief Investigations , 1991 .

[14]  Bharat A. Jain,et al.  The Post-Issue Operating Performance of IPO Firms , 1994 .

[15]  E. Fama,et al.  Risk, Return, and Equilibrium: Empirical Tests , 1973, Journal of Political Economy.

[16]  S. P. Kothari,et al.  A Market-Based Evaluation of Discretionary-Accrual Models , 1996 .

[17]  Brad M. Barber,et al.  Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics , 1997 .

[18]  Paul M. Healy,et al.  Discussion of a market-based evaluation of discretionary accrual models , 1996 .

[19]  Ivo Welch,et al.  Earnings Management and the Long-Run Market Performance of Initial Public Offerings , 1998 .

[20]  W. Mikkelson,et al.  Ownership and operating performance of companies that go public , 1997 .

[21]  J. Ritter.  The Long-Run Performance of Initial Public Offerings , 1991 .