Managing for the Moment: The Role of Earnings Management via Real Activities versus Accruals in SEO Valuation

2015 ◽  
Vol 91 (2) ◽  
pp. 559-586 ◽  
Author(s):  
S. P. Kothari ◽  
Natalie Mizik ◽  
Sugata Roychowdhury
Keyword(s):  
Stock Market ◽  
Earnings Management ◽  
Seasoned Equity Offering ◽  
Long Run ◽  
Real Activities Manipulation ◽  
The Moment ◽  
Jel Classifications ◽  
Equity Offering

ABSTRACT We assess the role of both accruals manipulation (AM) and real activities manipulation (RAM) in inducing overvaluation at the time of a seasoned equity offering (SEO). Our results reveal that earnings management is most consistently and predictably linked with post-SEO stock market underperformance when it is driven by RAM; in particular, the opportunistic reduction of expenditures on R&D and selling, general, and administrative activities. Thus, overvaluation at the time of the SEO is more likely when managers actively engage in more opaque channels to overstate earnings. Our findings are particularly relevant because managers exhibit a greater propensity for RAM at the time of SEOs, even though RAM is more costly in the long run. JEL Classifications: G14; G31; M4; M41

scholarly journals Surplus Free Cash Flow, Stock Market Segmentations and Earnings Management: The Moderating Role of Independent Audit Committee

2020 ◽  
pp. 097215092093406
Author(s):  
Ahmad A. Toumeh ◽  
Sofri Yahya ◽  
Azlan Amran
Keyword(s):  
Stock Market ◽  
Earnings Management ◽  
Cash Flow ◽  
Audit Committee ◽  
Management Practices ◽  
Free Cash Flow ◽  
The Body ◽  
Moderating Role ◽  
Independent Audit

Management engages in earnings manipulation for different reasons. This article argues that low-growth firms with high free cash flow will opt for income-increasing earnings management in order to obscure the low profits derived from their investments in negative net present value (NPV) projects. On the other hand, we argue that the listed companies might be interested in being listed in the first market due to its privileges and to preserve the competitiveness, through managing their earnings upwardly, so that they can satisfy the condition of achieving a particular earnings limit. This article should advance the body of earnings management literature in the Jordanian context by examining the effect of the moderating role of an independent audit committee (IAC) in the association between surplus free cash flow (SFCF) and income-increasing discretionary accruals (DAC). Further, this is the initial empirical attempt to investigate the moderation effect of IAC between stock market segmentations (SMS) and positive DAC. The results of this current study offer original and beneficial information for the Jordanian government and other countries with a similar institutional environment because the study promotes the application of applying IAC as an efficient tool to constrain management behaviour towards manipulation of the accruals. On top of that, this research offers information concerning the prevailing situation of earnings management practices and corporate governance in Jordan, in which shareholders, local and international investors, policymakers, regulators and academic researchers are interested. Finally, panel data analyses and various statistical techniques are employed to derive conclusions.

Investors' Interpretations of Imprecise Standards and Their Perceptions of Earnings Management by Reputable Companies

2020 ◽  
Vol 32 (2) ◽  
pp. 103-122
Author(s):  
Hwee-Cheng Tan ◽  
Diane Mayorga
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Reporting Practices ◽  
The Press ◽  
Company Reputation ◽  
Jel Classifications ◽  
Quasi Experiment

ABSTRACT Standards with imprecise guidelines require interpretation by users. In this study we investigate how investors' perceptions of earnings management vary with their interpretations of imprecise standards and the type of company reputation. We design a quasi-experiment that exploits the role of the press as a “watchdog” of corporate activities to focus the attention of investors on the financial reporting practices of companies. The results show that both factors interact to influence investors' perceptions. Investors, whose interpretations of the imprecise standard are inconsistent with that of the company, are more likely to suspect earnings management when the company has a financial rather than non-financial reputation. Investors in the inconsistent/financial reputation condition are also more likely to sell their investments than those in the inconsistent/non-financial reputation condition. The type of reputation does not show a significant effect on investors' perceptions when investors' interpretations are consistent with that of the company. JEL Classifications: M40; M41.

scholarly journals CORPORATE GOVERNANCE AND STOCK MARKET REACTION TO SEASONED EQUITY OFFERING ANNOUNCEMENT BY FIRMS IN NIGERIA

2021 ◽  
Vol 25 ◽  
pp. 73-98
Author(s):  
Mohammed Aminu Bello ◽  
Aminu Kado Kurfi ◽  
Bashir Tijjani
Keyword(s):  
Corporate Governance ◽  
Stock Market ◽  
Market Reaction ◽  
Abnormal Returns ◽  
Institutional Ownership ◽  
Board Independence ◽  
Seasoned Equity Offering ◽  
Board Size ◽  
Cumulative Abnormal Returns ◽  
Equity Offering

This study examined the effect of corporate governance variables of board independence, institutional ownership, managerial ownership, board size, and director expertise on the market reaction to seasoned equity offering (SEO) announcements by firms in the Nigerian stock market. The event study methodology was employed, and abnormal returns were computed using the market model. A total of 62 announcements by 38 firms listed on the Nigerian stock exchange from 1st January 2006 to 31st December 2016 were included in the analysis. The study recorded significant positive cumulative abnormal returns before and after the announcement day, and a significant negative cumulative abnormal return upon the announcement day of SEOs. Similarly, significant positive cumulative abnormal returns were recorded six months before the SEO announcement day and negative significant cumulative abnormal returns six, twelve, and twenty-four months after the announcements. Furthermore, there were significant cumulative abnormal returns upon SEO announcements for all the proxies of corporate governance assessed by the study. The implication of the findings of negative significant cumulative abnormal returns on the day of the announcement and beyond was consistent with previous arguments that firms issuing SEOs earn negative abnormal returns on the day of the announcement was the result of the information asymmetry between managers and investors. By contrast, the significant cumulative abnormal returns based on corporate governance suggested that corporate governance significantly impacted on SEO announcement returns in Nigeria. These findings suggest that policy makers should pay more attention to directors’ expertise, institutional ownership, board independence, and board size, as our results showed that investors might view them as dependable pointers of positive corporate information for the market, thus guaranteeing the best use of SEO proceeds.

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