Earnings management, stock issues, and shareholder lawsuits

Abnormal accounting accruals are unusually high around stock offers, especially high for firms whose offers subsequently attract lawsuits. Accruals tend to reverse after stock offers and are negatively related to post-offer stock returns. Reversals are more pronounced and stock returns are lower for...

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Bibliographic Details
Published in:Journal of financial economics 2004, Vol.71 (1), p.27-49
Main Authors: DuCharme, Larry L, Malatesta, Paul H, Sefcik, Stephan E
Format: Article
Language:English
Subjects:
Accrual basis accounting
Earnings
Earnings management
Economics
Finance
Financial economics
Initial public offering
Initial public offerings
IPOs
Litigation
Management
SEOs
Shareholder derivative suits
Shareholder lawsuits
Stock offers
Stock prices
Stockholders
Studies
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Summary:Abnormal accounting accruals are unusually high around stock offers, especially high for firms whose offers subsequently attract lawsuits. Accruals tend to reverse after stock offers and are negatively related to post-offer stock returns. Reversals are more pronounced and stock returns are lower for sued firms than for those that are not sued. The incidence of lawsuits involving stock offers and settlement amounts are significantly positively related to abnormal accruals around the offer and significantly negatively related to post-offer stock returns. Our results support the view that some firms opportunistically manipulate earnings upward before stock issues rendering themselves vulnerable to litigation.
ISSN:0304-405X
1879-2774
DOI:10.1016/S0304-405X(03)00182-X