Earnings Management and the Post-Issue Underperformance of Seasoned Equity Offerings

Posted: 22 Aug 1998  

Siew Hong Teoh

University of California - Paul Merage School of Business

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

T.J. Wong

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Abstract

Loughran and Ritter (1995) document that firms issuing seasoned equity offerings (SEOs) severely underperform the stock market for three to five years after the offering. Our paper examines the hypothesis that SEO investors are too optimistic because they naively extrapolate earnings trends without fully adjusting for observable discretionary managerial reporting choices. We find that aggressive firms, which report high pre-SEO earnings at the expense of post-SEO earnings by taking high discretionary pre-issue accruals, subsequently performed worse (abnormal stock returns and industry-adjusted net income). Aggressive quartile firms earned a highly significant-48% four-year cumulative abnormal return; conservative quartile firms earned an insignificant-7% four-year cumulative abnormal return. In contrast with discretionary accruals, pre-issue non-discretionary accruals did not predict post SEO returns. This paper is also available at the following web address: ftp://next.agsm.ucla.edu/academic.finance/mngseo.ps ftp://next.agsm.ucla.edu/academic.finance/mngseo.hp If you have any questions concerning downloading, please contact Professor Teoh.

JEL Classification: G14, M41

Suggested Citation

Teoh, Siew Hong and Welch, Ivo and Wong, T.J., Earnings Management and the Post-Issue Underperformance of Seasoned Equity Offerings. Available at SSRN: https://ssrn.com/abstract=2519

Siew Hong Teoh (Contact Author)

University of California - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

Ivo Welch

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tak Jun Wong

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
852.2609.7750 (Phone)

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