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

49 Pages Posted: 9 Jan 2008 Last revised: 17 Jun 2008

See all articles by Daniel A. Cohen

Daniel A. Cohen

University of Texas at Dallas - Naveen Jindal School of Management

Paul Zarowin

New York University (NYU) - Department of Accounting

Multiple version iconThere are 3 versions of this paper

Date Written: June 2008

Abstract

We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper 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 management tools around SEOs. Second, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEOs varies cross-sectionally. We find that firms choices vary predictably as a function of the firms 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. Third, we compare the economic costs of accrual versus real earnings management around SEOs, by examining the effect of each type of earnings management on the firms future performance. We provide the first evidence on this important issue by showing that the costs of real earnings management are likely greater than the costs of accrual earnings management, at least in the SEO context.

Keywords: Seasoned Equity Offerings, Earnings Management, Real Earnings Management

JEL Classification: G12, G14, G24, G38, M41, M43, M45

Suggested Citation

Cohen, Daniel A. and Zarowin, Paul, Accrual-Based and Real Earnings Management Activities Around Seasoned Equity Offerings (June 2008). Available at SSRN: https://ssrn.com/abstract=1081939 or http://dx.doi.org/10.2139/ssrn.1081939

Daniel A. Cohen (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)
972-883-6811 (Fax)

Paul Zarowin

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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