Causes or Consequences? Earnings Management Around Seasoned Equity Offerings

48 Pages Posted: 20 Mar 2008 Last revised: 16 Mar 2010

See all articles by Jie Chen

Jie Chen

Carnegie Mellon University - David A. Tepper School of Business

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy

Yi Tang

Fordham University - Gabelli School of Business

Date Written: October 10, 2008

Abstract

Prior studies find that earnings management around seasoned equity offerings is negatively related to subsequent stock performance and attribute the finding to the issuing firms' use of inflated earnings to boost stock prices. We show in this paper that earnings management is not significantly related to concurrent abnormal returns. Rather, it is significantly positively related to prior abnormal returns. This suggests that, rather than a cause of stock price run-up, earnings management is likely a consequence of the stock overvaluation prior to the offerings, supporting the agency theory of overvalued equity (Jensen, 2005). We also show that when examining the relation between earnings management and subsequent stock performance, one has to be careful with the appropriate window for measuring earnings management.

Keywords: Seasoned equity offerings, earnings management, postissue performance, market efficiency

JEL Classification: G14, G32, M41

Suggested Citation

Chen, Jie and Gu, Zhaoyang and Tang, Yi, Causes or Consequences? Earnings Management Around Seasoned Equity Offerings (October 10, 2008). AFA 2009 San Francisco Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1108063 or http://dx.doi.org/10.2139/ssrn.1108063

Jie Chen

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Zhaoyang Gu (Contact Author)

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

Shatin, N.T.
Hong Kong

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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