Search results

We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing.

Firms are concerned about earnings per share (EPS) dilution after equity issues. The purpose of this paper is to investigate whether firms manage upward their discretionary accruals around seasoned equity offerings (SEOs) to mitigate the impact of dilution on reported earnings.

The authors employ adjusted discretionary accruals from cash flow statements, normalized by the average common equity, in the multivariate tests.

There is evidence that SEO‐year discretionary accruals are the highest when contemporaneous operating cash flows are the lowest. Moreover, managers react to temporary rather than permanent declines in operating performance. Firms with the highest SEO‐year discretionary accruals experience the strongest improvements in post‐SEO operating cash flows. In addition, investors are not misled by the SEO‐year earnings management. There is no relation between the SEO‐year discretionary accruals and post‐SEO stock performance. Overall, these findings are consistent with the hypothesis that firms manage discretionary accruals around SEOs to mitigate the effect of temporary EPS dilution.

The paper's findings suggest that firms manage discretionary accruals during the SEO year to reduce the temporary negative impact of SEOs on operating performance measures, consistent with the EPS dilution hypothesis. Such earnings management makes earnings smoother and more predictable, improving earnings informativeness. The findings also suggest that misleading earnings management is not a common practice during the SEO year.

This paper adds to the literature questioning the evidence that managers frequently engage in misleading earnings management around corporate events. The authors provide an alternative explanation for earnings management around SEOs.

The purpose of this paper is to examine whether firms engage in earnings decreasing management before share repurchases to mislead investors or to smooth earnings and improve earnings informativeness.

The authors examine discretionary accruals and cash flows around open-market share repurchases. The primary discretionary accruals measure is industry- and performance-adjusted discretionary current accruals estimated from cash-flow data.

Results show that, firms experience temporary increases in operating cash flows and use negative discretionary accruals to smooth earnings before share repurchases. Firms with the highest pre-repurchase cash flows use the lowest pre-repurchase discretionary accruals. Moreover, pre-repurchase discretionary accruals reflect expectations about future operating cash flows. Firms with the strongest deterioration in operating cash flows after repurchases use the lowest pre-repurchase discretionary accruals. These findings suggest that repurchasing firms use earnings management to increase smoothness and predictability of reported earnings rather than to mislead investors.

This paper provides an alternative explanation to the finding of negative discretionary accruals before share repurchases. It adds to the literature on repurchases and earnings smoothing by showing that firms use earnings management around share repurchases to smooth earnings.

Both accounting and regulatory treatments classify securitizations as a “sale” of assets, therefore allowing the issuer to remove the assets from their books. The purpose of this paper is to present conjectural evidence of recourse activity and bankruptcy treatment that undermine the fundamental concept of true sale.

The authors use investor reactions to firm’s first securitizations to isolate investors’ views of the potential risk transfer.

Investor reactions to firms’ first securitization announcements suggest that investors, themselves, think of the effects of securitizations as more like a financing than an asset sale. Firms securitizing for the first time exhibit negative short-term equity returns and negative long-term operating performance, reactions more similar to financings than asset sales. Additional analysis shows that securitization is also associated with increased systematic risk, suggesting that the rapid growth fueled by securitization is similar to increasing leverage. The effect is more pronounced for banks than non-banks.

This is the first study to have used firms' first securitizations to analyze the nature of risk transfer in securitizations. The results show that off-balance-sheet treatment for securitizations may be inappropriate, given investor perceptions of the nature of potential contingent liabilities.