Purpose – The purpose of this paper is to examine the impact of earnings smoothing on the underpricing of seasoned equity offerings (SEOs). It aims to investigate whether earnings smoothing can add value to firms by reducing the degree of SEO underpricing. Design/methodology/approach – The sample of US common stock seasoned equity offerings (SEOs) by non‐regulated firms during 1989‐2009 was used to conduct various cross‐section, univariate, and multivariate tests, using several proxies for earnings smoothing, in order to confirm the impact of earnings smoothing on the degree of SEO underpricing. Three‐stage least square estimation was used to address the possible endogeneity of pricing and earnings smoothing. Findings – Smooth earnings performance resulting from discretionary accruals is negatively related to SEO underpricing and improves earnings informativeness. Consistent with risk management and signaling theories, managers' efforts to produce smooth earning reports may add value to their firms. Based on the mean values for SEOs, such smoothing reduces underpricing by $0.33 per share offered and increases the value of the average offering by $1.65 million. Smoothed earnings also conveys information about the firms' future performance, as firms with a long historical pattern of smooth earnings prior to SEOs significantly outperform, for at least three years after the SEO, those with more volatile earnings, with respect to stock returns and operating performance. Originality/value – The paper contributes specifically to the current literature on earnings smoothing by demonstrating that high quality firms that expect larger quantity of cash flows in the near future are more likely to actively smooth earnings via discretionary accruals before SEOs to reduce underpricing. The paper contributes generally by showing that firms can signal their quality to outside investors by showing smooth earnings over a long period of time and such firms are more likely to experience a lower degree of underpricing through SEO episodes.
Managerial Finance – Emerald Publishing
Published: Aug 3, 2012
Keywords: Earnings; Assets; Pricing; Stock markets; Earnings smoothing; Earnings informativeness; Seasonal equity offerings; SEO underpricing
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera