Research on seasoned equity offerings and herd effect of earnings management behavior

Because investors often compare the financial statements of similar competing firms when deciding how to allocate their funds, it is likely that a firm's financial well-being depends on how well it performs relative to its rivals. In order to seek a comparison advantage, each firm has strong incentive to acquire relative performance through earnings management, and enhances potential investors' assessment of its profitability and investment value. We propose a model to explain the dynamic characters of earnings management based on the interaction among several firms' disclosure policies when each firm selects a policy to maximize its expected price at each point in time. Under incomplete information, each firm's earnings management will be influenced by the earnings disclosure decisions of other firms, which leads to herd effect of earnings management.