Managing for the Moment: The Role of Earnings Management via Real Activities versus Accruals in SEO Valuation

Posted: 10 Jan 2012 Last revised: 31 May 2015

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Natalie Mizik

University of Washington

Sugata Roychowdhury

Boston College

Date Written: May 4, 2015

Abstract

We assess the role of both accruals manipulation (AM) and real activities manipulation (RAM) in inducing overvaluation at the time of a seasoned equity offering (SEO). Our results reveal that earnings management is most consistently and predictably linked with post-SEO stock market under-performance when it is driven by RAM, in particular, the opportunistic reduction of expenditures on R&D and selling, general and administrative activities. Thus, overvaluation at the time of the SEO is more likely when managers actively engage in more opaque channels to overstate earnings. Our findings are particularly relevant because managers exhibit a greater propensity for RAM at the time of SEOs, even though RAM is more costly in the long run.

Keywords: Earnings Management, Discretionary Accruals, Real Activity Manipulation, Seasoned Equity Offering, SEO Overvaluation, SEO Return Reversal, Earnings Management Opacity

JEL Classification: G14, G31, M40, M41

Suggested Citation

Kothari, S.P. and Mizik, Natalie and Roychowdhury, Sugata, Managing for the Moment: The Role of Earnings Management via Real Activities versus Accruals in SEO Valuation (May 4, 2015). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1982826 or http://dx.doi.org/10.2139/ssrn.1982826

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Natalie Mizik

University of Washington ( email )

Seattle, WA 98195
United States

Sugata Roychowdhury (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-1764 (Phone)

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