Do Firms Mislead Investors by Overstating Earnings Before Seasoned Equity Offerings?

49 Pages Posted: 24 Mar 1999

Date Written: October 5, 2000

Abstract

Rangan (1998) and Teoh, et al. (1998) argue the failure on part of investors to identify pre-offering earnings management as a cause for the post-offering stock underperformance. This paper re-examines their hypothesis. Like Rangan and Teoh et al., I find evidence of earnings overstatements by issuers, but show their conclusions on investor naivete to be influenced by skewness in long-run returns data. Far from being naive, investors appear to infer earnings management and rationally undo its effects at offering announcements. The paper shows this to be consistent with an extension of the Myers-Majluf model, which endogenizes asymmetric information between managers and investors around equity offerings. I conclude that earnings management by issuers may not be intended to mislead investors, but may merely reflect their rational response to anticipated market behavior at offering announcements.

Keywords: Corporate finance, accruals, earnings management, seasoned equity offerings, offering announcements

JEL Classification: G14, M41, M43

Suggested Citation

Shivakumar, Lakshmanan, Do Firms Mislead Investors by Overstating Earnings Before Seasoned Equity Offerings? (October 5, 2000). Available at SSRN: https://ssrn.com/abstract=154008 or http://dx.doi.org/10.2139/ssrn.154008

Lakshmanan Shivakumar (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8115 (Phone)
+44 20 7000 8101 (Fax)

HOME PAGE: http://faculty.london.edu/lshivakumar/

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