The Long-Run Performance of UK Rights Issuers
Posted: 29 Nov 2014
Date Written: December 20, 2006
The long-run performance of 424 UK rights issues during 1991-95 shows that issuers outperform the market and non-issuing peers in the pre-issue period and underperform in the post-issue period. To explain these results, we examine the timing and earnings management hypotheses and show that our results support the latter. Specifically, we find that issuing firms use discretionary current accruals to manipulate earnings, with operating performance improving significantly before the issue but deteriorating thereafter and that discretionary current accruals in the pre-issue year predict the return underperformance in the two years post-issue. That we find these results for rights issues where new equity is offered pro rata to existing shareholders suggests the incentives of managers or informed shareholders drive earnings management.
Keywords: earnings management, rights issues, SEOs, return performance, operating performance
JEL Classification: G14; G15; G24; G32; M41
Suggested Citation: Suggested Citation