Earnings management, institutional shareholdings, and performance of SEO firms

Abstract

Purpose

The purpose of this paper is to investigate the interaction between earnings management and institutional shareholdings of firms conducting seasoned equity offerings (SEOs).

Design/methodology/approach

The authors work on three issues: first, whether earnings management of firms conducting seasoned equity offerings (SEOs) affects institutional investors' investment in their stocks; second, whether SEO firms' earnings management induces insider selling; and third, whether earnings management and changes in old and new institutional shareholdings around SEOs can jointly predict the long‐run post‐issue performance.

Findings

The results show that firms with aggressive earnings management attract more new institutions to buy their shares and induce heavy insider selling after SEOs, but perform worse in the long run. Firms with conservative earnings management and a significant increase in new institutional shareholdings after SEOs perform well.

Originality/value

These results reveal that issuers manage earnings aggressively to be better off in the short run by obtaining more funds, receiving new institutional investment, and possibly allowing their insiders to sell stocks at higher prices, but to make shareholders worse off in long run by reducing their wealth. The positive relation between new institutions' participation and issuers' performance implies that some of these institutions have private information about or can effectively monitor SEO firms.

Citation

Yang, W., Hsu, J. and Yang, T. (2013), "Earnings management, institutional shareholdings, and performance of SEO firms", Managerial Finance, Vol. 39 No. 6, pp. 528-549. https://doi.org/10.1108/03074351311322834