Earnings Management and Expected Dividend Increases Around Seasoned Share Issues: Evidence from Finland

Scandinavian Journal of Management

Posted: 27 Aug 1999

See all articles by Juha Kinnunen

Juha Kinnunen

Aalto University School of Business

Matti Keloharju

Aalto University - School of Business; Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Eero Kasanen

Helsinki School of Economics

Jyrki Niskanen

University of Tampere

Abstract

This paper suggests that firms use their opportunities for earnings management to inform the capital market of the quality of their equity issues. We argue that firms issuing new shares with higher discounts, and hence with larger expected dividend increases, are likely to report larger earnings in excess of the benchmark defined by current dividends than firms issuing shares at lower discounts or not issuing shares at all. These excess earnings are useful to the issuing firms because they reinforce the buffer of retained earnings, thereby strengthening the good news of the expected dividend increase implied by the issue announcement. Our empirical results are consistent with this argument. The findings indicate (1) that by the year of a share issue, (cumulative abnormal) excess earnings are significantly larger in issuing than in non-issuing firms; (2) that there is a significant positive correlation between the abnormal excess earnings and the expected dividend increase of the issue announcement; and (3) that the (market-adjusted) stock return around the issue announcement has a significant positive correlation with the abnormal excess earnings and with the expected dividend increase, while there is also a significant interactive effect such that excess earnings corroborate the information conveyed by the expected dividend increase.

Note: This is a description of the paper and not the actual abstract.

JEL Classification: M41, G35

Suggested Citation

Kinnunen, Juha and Keloharju, Matti and Kasanen, Eero and Niskanen, Jyrki, Earnings Management and Expected Dividend Increases Around Seasoned Share Issues: Evidence from Finland. Scandinavian Journal of Management. Available at SSRN: https://ssrn.com/abstract=167508

Juha Kinnunen (Contact Author)

Aalto University School of Business ( email )

PO Box 21220
FI-00076 AALTO
Helsinki
Finland

Matti Keloharju

Aalto University - School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland
+358 40 353 8043 (Phone)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Eero Kasanen

Helsinki School of Economics ( email )

P.O. Box 1210
Department of Accounting and Finance
Helsinki 00100
Finland

Jyrki Niskanen

University of Tampere ( email )

Department of Business Economics PL 607
FIN-33101 Tampere
Finland
+358 3 215 7214 (Fax)

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