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Earnings Management As An Explanation Of The Equity Issue Puzzle

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Author Info
María Jesús Pastor () (Universidad de Alicante)
Francisco Poveda (Universidad de Alicante)
Abstract

The poor stock price performance of firms that raise capital through seasoned equity offerings is one of the recent puzzles in financial literature. In this study we investigate whether pre-issue earnings management can explain these results for rights issues in Spain. Consistent with this explanation, we notice that firms¿ issuing rights make use of discretionary accruals to report higher earnings prior to the offering. Most interestingly, the decrease in discretionary accruals the years following the offering explains the underperformance in stock returns.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2005-04.pdf
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Publisher Info
Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2005-04.

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Length: 35 pages
Date of creation: Feb 2005
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2005-04

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Related research
Keywords: Corporate Finance; Seasoned Equity Offerings; Earnings Management; Accounting Accruals;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
  2. John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, 02. [Downloadable!] (restricted)
  3. Kothari, S. P. & Warner, Jerold B., 1997. "Measuring long-horizon security price performance," Journal of Financial Economics, Elsevier, vol. 43(3), pages 301-339, March. [Downloadable!] (restricted)
  4. Lee, Inmoo, 1997. " Do Firms Knowingly Sell Overvalued Equity?," Journal of Finance, American Finance Association, vol. 52(4), pages 1439-66, September. [Downloadable!] (restricted)
  5. Spiess, D. Katherine & Affleck-Graves, John, 1995. "Underperformance in long-run stock returns following seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 38(3), pages 243-267, July. [Downloadable!] (restricted)
  6. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings1," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October. [Downloadable!] (restricted)
  7. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March. [Downloadable!] (restricted)
  8. Loughran, Tim & Ritter, Jay R, 1997. " The Operating Performance of Firms Conducting Seasoned Equity Offerings," Journal of Finance, American Finance Association, vol. 52(5), pages 1823-50, December. [Downloadable!] (restricted)
  9. Loughran, Tim & Ritter, Jay R., 2000. "Uniformly least powerful tests of market efficiency," Journal of Financial Economics, Elsevier, vol. 55(3), pages 361-389, March. [Downloadable!] (restricted)
  10. Rangan, Srinivasan, 1998. "Earnings management and the performance of seasoned equity offerings1," Journal of Financial Economics, Elsevier, vol. 50(1), pages 101-122, October. [Downloadable!] (restricted)
  11. Shivakumar, Lakshmanan, 2000. "Do firms mislead investors by overstating earnings before seasoned equity offerings?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 339-371, June. [Downloadable!] (restricted)
  12. Brav, Alon & Geczy, Christopher & Gompers, Paul A., 2000. "Is the abnormal return following equity issuances anomalous?," Journal of Financial Economics, Elsevier, vol. 56(2), pages 209-249, May. [Downloadable!] (restricted)
    Other versions:
  13. Randall A. Heron & Erik Lie, 2004. "A Comparison of the Motivations for and the Information Content of Different Types of Equity Offerings," Journal of Business, University of Chicago Press, vol. 77(3), pages 605-632, July. [Downloadable!]
  14. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March. [Downloadable!] (restricted)
  15. Narasimhan Jegadeesh, 2000. "Long-Term Performance of Seasoned Equity Offerings: Benchmark Errors and Biases in Expectations," Financial Management, Financial Management Association, vol. 29(3), Fall.
  16. Francisco Poveda, 2003. "Nuevo Enfoque En La Estimación De Los Ajustes Por Devengo Anormales: Un Modelo Desagregado," Working Papers. Serie EC 2003-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  17. Cai, Jun, 1998. "The Long-Run Performance Following Japanese Rights Issues," Applied Financial Economics, Taylor and Francis Journals, vol. 8(4), pages 419-34, August. [Downloadable!] (restricted)
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