Seasoned Equity Offerings Earnings Management and Secondary Share Issuance

摘要

We use secondary share data from a sample of 1,925 seasoned equity offerings (SEOs) to examine earnings management as a possible explanation for the long-run underperformance of SEO firms. We find strong evidence that firms issuing secondary shares (existing shares sold by insiders) manage earnings downwards and find weaker evidence that firms issuing only primary shares (new shares sold by the firm) manage earnings upwards. In addition, we find that the abnormal stock performance of these sub-samples is consistent with the earnings management/liability avoidance hypothesis for long-run underperformance. The liability avoidance theory suggests that secondary issue firms would manage earnings downwards, resulting lower accruals and better long-run returns, than primary issue firms because poor stock performance after insider selling may increase the likelihood of and the success of shareholder lawsuits. As this would suggest, we find the high accrual firms issuing only primary shares significantly underperform the low accrual firms issuing secondary shares. Finally, regression analysis shows that the proportion of secondary shares issued can explain the level of earnings management and that the level of earnings management is a significant determinant of abnormal stock performance.