Publication Type

Journal Article

Publication Date

12-2016

Abstract

This study examines the effect of accounting flexibility on managers’ forecasting behavior prior to seasoned equity offerings (SEOs). Although SEO firms have a strong incentive to convey optimistic information to boost the pre-SEO stock price, they also face enhanced litigation risk arising from SEO-related regulations. Thus, I hypothesize that managers will release positive news through their forecasts (relative to the prevailing analyst consensus) prior to an SEO only if they have the accounting flexibility to manage subsequent reported earnings to meet or exceed their forecasts. I find that managers with greater accounting flexibility are more likely to issue a forecast prior to the SEO and that their forecasts are more likely to convey positive news and are more specific. Furthermore, I find no effect of accounting flexibility for non-SEO control firms or for non-SEO periods. My results suggest that when managers experience a tension between the incentive for voluntary disclosure and high litigation risk, accounting flexibility is an important factor that determines their forecasting behavior.

Keywords

Voluntary disclosure, management earnings forecast, accounting flexibility, seasoned equity offerings

Discipline

Accounting | Corporate Finance

Research Areas

Financial Intermediation and Information

Publication

Review of Accounting Studies

Volume

21

Issue

4

First Page

1361

Last Page

1400

ISSN

1380-6653

Identifier

10.1007/s11142-016-9372-0

Publisher

Springer Verlag (Germany)

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1007/s11142-016-9372-0

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