Earnings Management around Seasoned Equity Offerings: Evidence from Non-Investment Accruals.
52 Pages Posted: 7 Nov 2019 Last revised: 6 Nov 2020
Date Written: October 28, 2019
Managers appear to inflate non-investment accruals and then adjust financing decisions to capitalize on such inflation. Using a large sample of corporate seasoned equity offerings (SEOs) for the period 1972 - 2017, we find that firms which adjust non-investment accruals to inflate pre-issue earnings have lower stock returns in the following years. Our evidence is consistent with investors being overly optimistic at the time of the issue, while in the long run revaluing the firm downwards because high reported earnings are not justified by fundamentals. Quantile analysis indicate that SEO-firms which aggressively inflate non-investment accruals have a 12% stock return under-performance in the post-issue year compared to their conservative counterparts. We find that managers are more aggressive with the pre-issue inflation of their non-investment accruals when the firm is highly dependent on equity financing.
Keywords: Earnings management, Market efficiency, Stock returns, Discretionary accruals, Non-investment accruals, Equity issues, Equity dependent firms
JEL Classification: G10, G30, G32, M10, M40, M48
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