Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings

Abstract

We examine earnings management behavior around SEOs, focusing on both realactivities and accrual-based manipulation, and how this behavior varies over time andcross-sectionally. Although research has addressed the issues of earnings managementaround SEOs and earnings management via real activities manipulation, ours is the firstpaper to put these two issues together. We make three contributions to the literature.First, we document that firms use real, as well as accrual-based, earnings managementtools around SEOs. Second, consistent with the expectation that the Sarbanes-Oxley Act(SOX) has made accrual-based earnings management more costly, we find that firmshave substituted from accrual to real earnings management after SOX. Finally, we show how the tendency for firms to tradeoff real versus accrual-based earnings managementactivities around SEOs varies cross-sectionally. We find that firms choices vary predictably as a function of the firm s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management.