Earnings Management around Secondary Equity Offerings by Insiders

Abstract

The problem is author cannot isolate IPO incentives for earnings management (Hughes, 1986, Clarkson et al., 1992; Teoh, Welch, and Wong, 1998a, b; Heron and Lie, 2004; Ball and Shivakumar’s, 2008) because managers do manage earnings upwards before IPO and later downward after IPO. If managers avoid litigation from shareholders, they can choose not to manage earnings rather than managing less earnings. If investors think they may be misled about firm value, they can ask lower share price and managers do not need manage earnings. I think it should provide more evidence to persuade me. Of course, DuCharme et al. (2004) provide evidence that firms with upward earnings management face higher litigation risk. But, they can choose not to manage earnings so as to not face this litigation risk. However, the researchers argue that managers even manage earnings downwards to avoid. It is another matter because litigation risk can deter firms managing upward EM but does not mean they need to manage down. It needs to provide more prior works to show that firms with higher litigation risk are likely to manage earnings downwards. It is reasonable for firms managing upward after SEO.