Seasoned Capital Offerings: Earnings Management and Long-Run Operating Performance of Indian Firms

Abstract

The present study examines the behavior of seasoned offering firms surrounding their issue period for the capital issues offered during the period 1995-96 to 1998-99. Analysis of earnings management practices of firms though show apparent differences in terms of discretionary current accruals between issuers and non-issuers as well as between debt issuers and equity issuers, these differences are not statistically significant. This finding is consistent with Korean findings of Yoon and Miller (2002). Perhaps earnings management is all pervasive and is not just confined to seasoned offering firms in emerging markets unlike the markets in developed countries. Analysis of adjusted operating performance of firms show important differences for equity offering and debt offering seasoned firms. Similarly earnings management appears to have negative impact on the immediate post-issue operating performance while in the long-term it appears to have a positive impact for equity issuers. The latter result contradicts the findings of Rangan (1998) and Teoh et, al (1998). Analysis of influence of earnings management on stock market performance of seasoned offerings shows insignificant role of discretionary current accruals in explaining post-issue stock returns. Similarly analysis of determinants of SEO decision shows that run up in adjusted operating performance prior to offer has no impact - thus contradicting the view that seasoned offerings are timed to meet better operating performance - and that information asymmetry has positive influence on the decision to issue seasoned equity.