Disclosure and earnings management by seasoned equity offering firms

In this study I use a sample of seasoned equity offerings (SEOs) between 1990 and 1997 to examine the systematic relation between earnings management and disclosure activity of offering firms and its implications for the resource allocation of the economy. The results show that firms maintaining a high level of disclosure activity manage earnings less, but firms increasing disclosure activity shortly before an offering announcement manage earnings more. The level of disclosure is inversely related to operating performance and the changes in operating performance, and positively related to the size of SEO firms. Results also show that the high level of disclosure activity limits earnings management around SEOs when other determinants of earnings management are controlled and the simultaneous nature of disclosure and earnings management is considered. Investors do not recognize and react to earnings management before the offering announcement and only partially recognize and undo earnings management at the time of offering announcement for firms maintaining low levels of disclosure and firms not increasing disclosure activity shortly before offering announcements. It is also found that the motivation for using discretionary accruals may be different across differing degrees of disclosure activity.