Earnings Management and the Post-Issue Underperformance in Seasoned Equity Offerings

Posted: 10 Oct 1998

See all articles by Siew Hong Teoh

Siew Hong Teoh

UCLA Anderson School of Management

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

T.J. Wong

University of Sothern California

Abstract

Loughran and Ritter (1995) document that firms issuing seasoned equity offerings (SEOs) severely underperform the stock market for three to five years after the offering. Our paper examines the hypothesis that SEO investors are too optimistic because they naively extrapolate earnings trends without fully adjusting for observable discretionary managerial reporting choices. We find that aggressive firms, which report high pre-SEO earnings at the expense of post-SEO earnings by taking high discretionary pre-issue accruals, subsequently perform worse (abnormal stock returns and industry-adjusted net income). Aggressive quartile firms earned a highly significant-50% four-year cumulative abnormal return; conservative quartile firms earn an insignificant-7% four-year cumulative abnormal return. In contrast with discretionary accruals, pre-issue non-discretionary accruals did not predict post-SEO returns.

JEL Classification: G14, G32, M41

Suggested Citation

Teoh, Siew Hong and Welch, Ivo and Wong, T.J., Earnings Management and the Post-Issue Underperformance in Seasoned Equity Offerings. Available at SSRN: https://ssrn.com/abstract=6435

Siew Hong Teoh (Contact Author)

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/teoh

Ivo Welch

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

T.J. Wong

University of Sothern California ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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