Earnings management and the performance of seasoned equity offerings

Recent studies document that firms conducting seasoned equity offerings experience poor stock price and earnings performance in the post-offering period. I investigate whether earnings management around the time of the offering can explain a portion of the poor performance. Consistent with this explanation, I show that earnings management during the year around the offering predicts both earnings changes and market-adjusted stock returns in the following year. These findings suggest that the stock market temporarily overvalues issuing firms and is subsequently disappointed by predictable declines in earnings caused by earnings management. (C) 1998 Elsevier Science S.A. All rights reserved.