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Firm's motives behind SEOs, earnings management, and performance

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  • Yang, Tung-Hsiao
  • Hsu, Junming
  • Yang, Wen-Ben

Abstract

This study hypothesizes that financial constraints and financial distress risk can drive firms to report greater earnings around seasoned equity offerings (SEOs) but result in different performance in the long run. We confirm this argument and show that aggressively earnings-managing firms with financial constraints and high distress risk perform well and poorly after SEOs, respectively. These results imply that financially constrained firms fairly signal their post-issue profitability due to the release of operational inflexibility, while those with high distress risk inflate earnings to benefit from greater proceeds. We contribute to the literature by showing that firms with different characteristics convey distinct information in reported earnings around SEOs. This finding reminds auditors to watch firms with defective reporting intention and helps long-run investors select right targets.

Suggested Citation

  • Yang, Tung-Hsiao & Hsu, Junming & Yang, Wen-Ben, 2016. "Firm's motives behind SEOs, earnings management, and performance," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 160-169.
    • Handle: RePEc:eee:reveco:v:43:y:2016:i:c:p:160-169
    DOI: 10.1016/j.iref.2015.10.038
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    Cited by:

    1. Wang, Teng-Shih & Lin, Yi-Mien & Werner, Edward M. & Chang, Hsihui, 2018. "The relationship between external financing activities and earnings management: Evidence from enterprise risk management," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 312-329.
    2. Dutta, Shantanu & Fuksa, Michel & Macaulay, Ken, 2019. "Determinants of MD&A sentiment in Canada," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 130-148.
    3. Majeed, Muhammad Ansar & Yan, Chao & Zhong, Huijie, 2022. "Do firms manipulate earnings after winning public-private partnership bids? Evidence from China," Emerging Markets Review, Elsevier, vol. 51(PB).
    4. Chihyoun Ahn & Mi-Ok Kim & Hyung-Rok Jung, 2017. "The Effects of Operational Structure Change on Performance after Seasoned Equity Offerings," Sustainability, MDPI, vol. 10(1), pages 1-17, December.
    5. Pindado, Julio & Requejo, Ignacio & Rivera, Juan C., 2017. "Economic forecast and corporate leverage choices: The role of the institutional environment," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 121-144.
    6. Chang, Chu-Hsuan & Lin, Hsiou-Wei William, 2018. "Does there prevail momentum in earnings management for seasoned equity offering firms?," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 111-129.

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