Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-15T10:35:43.359Z Has data issue: false hasContentIssue false
  • English
  • Français

Pricing of Seasoned Equity Offers and Earnings Management

Published online by Cambridge University Press:  06 April 2009

Yongtae Kim  and
Myung Seok Park
Yongtae Kim
Affiliation:
y1kim@scu.edu, Leavey School of Business, Santa Clara University, 500 El Camino Real, Santa Clara, CA 95053
Myung Seok Park
Affiliation:
mspark@vcu.edu, School of Business, Virginia Commonwealth University, 1015 Floyd Avenue, Richmond, VA 23284.
Get access Rights & Permissions [Opens in a new window]

Abstract

This study examines the relations between earnings management by firms offering seasoned equity issues and the pricing of their offers. We hypothesize that seasoned equity offering (SEO) firms that employ aggressive accounting decisions also more aggressively push up their offer prices, thereby leading to a decrease in the degree of underpricing. Consistent with our prediction (the issuer's greed hypothesis), evidence indicates that SEO firms that make opportunistic accounting decisions issue new shares at inflated prices. Our findings remain robust after controlling for other determinants of SEO underpricing and the possible endogeneity of pricing and earnings management.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 435 - 463
Copyright
Copyright © School of Business Administration, University of Washington 2005

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aggarwal, R.; Prabhala, N.; and Puri, M.. “Institutional Allocation in Initial Public Offerings: Empirical Evidence.“ Journal of Finance, 57 (2002), 1421–1442.CrossRefGoogle Scholar
Altinkiliç, O., and Hansen, R. S.. “Discounting and Underpricing in Seasoned Equity Offers.“ Journal of Financial Economics, 69 (2002), 285–323.CrossRefGoogle Scholar
Becker, C. L.; DeFond, M. L.; Jiambalvo, J.; Subramanyam, K. R.. “The Effect of Audit Quality on Earnings Management.“Contemporary Accounting Research, 15 (1998), 1–24.CrossRefGoogle Scholar
Benveniste, L., and Spindt, P. A.. “How Investment Bankers Determine the Offer Price and Allocation of New Issues.” Journal of Financial Economics, 28 (1989), 343–362.CrossRefGoogle Scholar
Bradley, D., and Jordan, B. D.. “Partial Adjustment to Public Information and IPO Underpricing.” Journal of Financial and Quantitative Analysis, 37 (2002), 595–616.CrossRefGoogle Scholar
Corwin, S. A. “The Determinants of Underpricing for Seasoned Equity Offers.” Journal of Finance, 58 (2003), 2249–2279.CrossRefGoogle Scholar
Das, S., and Zhang, H.. “Rounding-Up in Reported EPS, Behavioral Thresholds, and Earnings Management.” Journal of Accounting and Economics, 35 (2003), 31–50.CrossRefGoogle Scholar
Dechow, P. M.; Sloan, R. G.; and Sweeney, A. P.. “Detecting Earnings Management.” The Accounting Review, 70 (1995), 193–225.Google Scholar
Denis, D., and Sarin, A.. “Is the Market Surprised by Poor Earnings Realizations following Seasoned Equity Offerings?” Journal of Financial and Quantitative Analysis, 36 (2001), 169–193.CrossRefGoogle Scholar
Degeorge, F.; Patel, J.; and Zeckhauser, R.. “Earnings Management to Exceed Thresholds.” Journal of Business, 72 (1999), 1–33.CrossRefGoogle Scholar
DuCharme, L. L.; Malatesta, P. H.; and Sefcik, S. E.. “Earnings Management: IPO Valuation and Subsequent Performance.” Journal of Accounting, Auditing and Finance, 16 (2001), 369–396.CrossRefGoogle Scholar
Easton, P. D., and Zmijewski, M.. “SEC Form 10K/10Q Reports and Annual Reports to Shareholders: Reporting Lags and Squared Market Model Prediction Errors.” Journal of Accounting Research, 31 (1993), 113–129.CrossRefGoogle Scholar
Eckbo, B. E., and Masulis, R. W.. “Adverse Selection and the Rights Offer Paradox.” Journal of Financial Economics, 32 (1992), 293–332.CrossRefGoogle Scholar
Friedlan, J. M. “Accounting Choices by Issuers of Initial Public Offerings.” Contemporary Accounting Research, 11 (1994), 1–33.CrossRefGoogle Scholar
Gerard, B., and Nanda, V.. “Trading and Manipulation around Seasoned Equity Offerings.” Journal of Finance, 48 (1993), 213–245.CrossRefGoogle Scholar
Gibson, S.; Safieddine, A.; and Sonti, R.. “Smart Investments by Smart Money: Evidence from Seasoned Equity Offerings.” Journal of Financial Economics, 72 (2004), 581–604.CrossRefGoogle Scholar
Hirshleifer, D. “Investor Psychology and Asset Pricing.” Journal of Finance, 56 (2001), 1533–1597.Google Scholar
Hribar, P., and Collins, D. W.. “Errors in Estimating Accruals: Implications for Empirical Research.” Journal of Accounting Research, 40 (2002), 105–134.CrossRefGoogle Scholar
Jo, H., and Kim, Y.. “Disclosure Frequency and Earnings Management of Firms Conducting Seasoned Equity Offerings.” Unpubl. Working Paper, Santa Clara Univ. (2003).Google Scholar
Jones, J. “Earnings Management during Import Relief Investigations.“ Journal of Accounting Research, 29 (1991), 193–228.CrossRefGoogle Scholar
Kasznik, R. “On the Association between Voluntary Disclosure and Earnings Management.” Journal of Accounting Research, 37 (1999), 57–81.CrossRefGoogle Scholar
Kim, K. A., and Shin, H.. “The Underpricing of Seasoned Equity Offerings: 1983–1998.“ Unpubl. Working Paper, Univ. of Wisconsin-Milwaukee and SUNY Buffalo (2001).Google Scholar
Korajczyk, R. A.; Lucas, D. J.; and McDonald, R. L.. “The Effect of Information Releases on the Pricing and Timing of Equity Issues.” Review of Financial Studies, 41 (1991), 685–708.CrossRefGoogle Scholar
Lease, R. C.; Masulis, R. W.; and Page, J. R.. “An Investigation of Market Microstructure Impacts on Event Study Returns.” Journal of Finance, 46 (1991), 1523–1536.CrossRefGoogle Scholar
Loderer, C. F.; Sheehan, D. P.; and Kadlec, G. B.. “The Pricing of Equity Offerings.” Journal of Financial Economics, 29 (1991), 35–57.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “Why Don't Issuers Get Upset about Leaving Money on the Table in IPOs?“ Review of Financial Studies, 15 (2002), 413–443.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “Why Has IPO Underpricing Increased over Time?” Unpubl. WorkingPaper, Univ. of Notre Dame and Univ. of Florida, (2004).Google Scholar
owry, M., and Schwert, G. W.. “IPO Market Cycles: Bubbles or Sequential Learning?” Journal of Finance, 57 (2002), 1171–1200.Google Scholar
Matsumoto, D. A. “Management's Incentives to Avoid Negative Earnings Surprises.” Accounting Review, 77 (2002), 483–514.CrossRefGoogle Scholar
Mola, S., and Loughran, T.. “Discounting and Clustering in Seasoned Equity Offering Prices.” Journal of Financial and Quantitative Analysis, 39 (2004), 1–23.CrossRefGoogle Scholar
Ramanathan, R. “Introductory Econometrics with Applications.” Hinsdale, IL: Dryden Press (1998).Google Scholar
Rangan, S. “Earnings Management and the Performance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 101–122.CrossRefGoogle Scholar
Ritter, J. R. “Signaling and the Valuation of Unseasoned New Issues: A Comment.” Journal of Finance, 39 (1984), 1231–1237.CrossRefGoogle Scholar
Ritter, J. R. “Behavioral Finance.” Pacific-Basin Finance Journal, 11 (2003), 429–437.CrossRefGoogle Scholar
Ritter, J. R., and Welch, I.. “A Review of IPO Activity, Pricing, and Allocations.“ Journal of Finance, 4 (2002), 1795–1828.CrossRefGoogle Scholar
Rock, K. “Why New Issues Are Underpriced?” Journal of Financial Economics, 15 (1986), 187–212.CrossRefGoogle Scholar
Safieddine, A., and Wilhelm, W. J.. “An Empirical Investigation of Short-Selling Activity Prior to Seasoned Equity Offerings.” Journal of Finance, 51 (1996), 729–749.Google Scholar
Schipper, K. “Commentary on Earnings Management.” Accounting Horizons, 3 (1989), 91–102.Google Scholar
Shefrin, H. “Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing.” Boston, MA: Harvard Business School Press (2000).Google Scholar
Shivakumar, L. “Do Firms Mislead Investors by Overstating Earnings before Seasoned Equity Offerings?” Journal of Accounting and Economics, 29 (2000), 339–371.CrossRefGoogle Scholar
Subramanyam, K. R. “The Pricing of Discretionary Accruals.” Journal of Accounting and Economics, 22 (1996), 249–281.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Long-Term Performance of Initial Public Offerings.” Journal of Finance, 53 (1998a), 1935–1974.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and T. J.Wong. “Earnings Management and the Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998b), 63–99.CrossRefGoogle Scholar
Teoh, S. H., and Wong, T. J.. “Why New Issues and High-Accrual Firms Underperform: The Role of Analysts' Credulity.” Review of Financial Studies, 15 (2002), 1–23.CrossRefGoogle Scholar
Watts, R. L., and Zimmerman, J. L.. “Towards a Positive Theory of the Determination of Accounting Standards.” The Accounting Review, 53 (1978), 112–134.Google Scholar
Zmijewski, M., and Hagerman, R.. “An Income Strategy Approach to the Positive Theory of Accounting Standard Setting/Choice.” Journal of Accounting and Economics, 3 (1981), 129–149.CrossRefGoogle Scholar