Cohen Zarowin

Cohen Zarowin - Accrual-Based and Real Earnings Management...

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Electronic copy available at: http://ssrn.com/abstract=1081939 Accrual-Based and Real Earnings Management Activities around Seasoned Equity Offerings Daniel A. Cohen and Paul Zarowin* New York University Stern School of Business June, 2008 Abstract We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual- based, earnings management tools around SEOs. Second, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEO’s varies cross-sectionally. We find that firms’ choices vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management. Third, we compare the economic costs of accrual versus real earnings management around SEO’s, by examining the effect of each type of earnings management on the firm’s future performance. We provide the first evidence on this important issue by showing that the costs of real earnings management are likely greater than the costs of accrual earnings management, at least in the SEO context. JEL Classification: G14; G32; M4; M41 Keywords: Seasoned equity offerings; Earnings management; Accounting choices; Accounting Accruals; Real activities * Contact information: Daniel can be reached at dcohen@stern.nyu.edu , 212-998-0267 and Paul can be reached at pzarowin@stern.nyu.edu , 212-998-0015. We thank Ross Watts (the editor) and an anonymous referee for helpful comments and suggestions that improved the paper. We thank the Stern School of Business at New York University for financial support.
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Electronic copy available at: http://ssrn.com/abstract=1081939 1 Accrual-Based and Real Earnings Management Activities around Seasoned Equity Offerings Abstract We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual- based, earnings management tools around SEOs. Second, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEO’s varies cross-sectionally. We find that firms’ choices vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management. Third, we compare the economic costs of accrual versus real earnings
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Cohen Zarowin - Accrual-Based and Real Earnings Management...

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