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Earnings Management As An Explanation Of The Equity Issue Puzzle

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  • María Jesús Pastor

    ()
    (Universidad de Alicante)

  • Francisco Poveda

    (Universidad de Alicante)

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    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
    File Function: Fisrt version / Primera version, 2005
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    Bibliographic 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;

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    References

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    1. 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.
    2. 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.
    3. 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.
    4. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    5. 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.
    6. Lee, Inmoo, 1997. " Do Firms Knowingly Sell Overvalued Equity?," Journal of Finance, American Finance Association, vol. 52(4), pages 1439-66, September.
    7. Jun Cai, 1998. "The long-run performance following Japanese rights issues," Applied Financial Economics, Taylor & Francis Journals, vol. 8(4), pages 419-434.
    8. Randall A. Heron & Erik Lie, 2004. "A Comparison of the Motivations for and the Information Content of Different Types of Equity Offerings," The Journal of Business, University of Chicago Press, vol. 77(3), pages 605-632, July.
    9. 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.
    10. 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.
    11. Rangan, Srinivasan, 1998. "Earnings management and the performance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 101-122, October.
    12. 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.
    13. Richard Stehle & Olaf Ehrhardt & René Przyborowsky, 2000. "Long-run stock performance of German initial public offerings and seasoned equity issues," European Financial Management, European Financial Management Association, vol. 6(2), pages 173-196.
    14. 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).
    15. 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.
    16. 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.
    17. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
    18. 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.
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    Cited by:
    1. Mohamed Faker Klibi & Hamadi Matoussi, 2007. "Gestion Des Resultats Et Performance Comptable Et Boursiere Des Entreprises Émettrices De Nouvelles Actions," Post-Print halshs-00534752, HAL.

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