Do Firms Mislead Investors by Overstating Earnings Around Seasoned Equity Offerings?
Posted: 28 Oct 2000
Abstract
The paper examines whether firms overstate earnings before seasoned equity offerings and whether, at offering announcements, investors recognize and undo the effects of such earnings management. Consistent with Rangan (1998) and Teoh et al. (1998), I find evidence of earnings management around the offerings. However, in contrast to Rangan and Teoh et al.'s conclusions on investors naivete, I show that investors undo this earnings management at equity offerings announcements. The investor naivete conclusion of Teoh et al. (1998) and Rangan (1998) appears to be due to test misspecification. Overall, the results in the paper seems to suggest, at first glance, that earnings management by issuers is wasteful. However, using a rational expectations framework, this paper shows that earnings management by issuers, rather than being intended to mislead investors, may actually be the rational response of issuers to anticipated market behavior at offering announcements.
Note: This is a description of the paper and not the actual abstract.
JEL Classification: G14, M41, M43
Suggested Citation: Suggested Citation