Financial Statement Comparability and Valuation of Seasoned Equity Offerings

Abstract

This study examines the relationship between financial statement comparability and the valuation of seasoned equity offerings (SEOs). We argue that financial statement comparability allows underwriters and investors to better assess the quality of firms that tap into the seasoned equity market through better comparison with peer firms, thus reducing price protection on the part of the underwriter and manipulation of investor perceptions about the true underlying value of the firm’s equity securities on the part of the firm. As a result, we find that SEO firms with better comparability experience less underpricing at the time of seasoned equity offerings. We also find that better financial statement comparability attenuates management’s ability to sell overvalued equity, especially for SEO firms with non-negative earnings surprises and positive real earnings management. Findings in this paper provide empirical evidence to support the decision usefulness of financial statement comparability.