EARNINGS MANAGEMENT AND THE UNDERPERFORMANCE OF SEASONED EQUITY OFFERINGS

Seasoned equity issuers can raise reported earnings by altering discre tionary accounting accruals. We find that issuers who adjust discretio nary current accruals to report higher net income prior to the offerin g have lower post-issue long-run abnormal stock returns and net income . Interestingly, the relation between discretionary current accruals a nd future returns (adjusted for firm size and book-to-market ratio) is stronger and more persistent for seasoned equity issuers than for non -issuers. The evidence is consistent with investors naively extrapolat ing pre-issue earnings without fully adjusting for the potential manip ulation of reported earnings. (C) 1998 Elsevier Science S.A. All right s reserved.