This dissertation examines changes in managers’ financial reporting around two major corporate financing events, accelerated share repurchases (ASRs) and seasoned equity offerings (SEOs). The first essay provides evidence on managerial motives for initiating ASRs, a recent and important innovation in repurchase methods, by examining managers’ financial reporting behavior around ASRs and post-ASR performance. ASR firms report positive discretionary accruals in the quarter of the repurchase announcement and that the upward earnings management increases with the percentage of equity repurchased, initiation of the repurchase earlier in the quarter, and CEO’s bonus compensation as a fraction of total compensation. There is however a negative association between the ASR announcement returns and pre-repurchase positive discretionary accruals, suggesting that investors perceive the positive discretionary accruals as the result of managerial opportunism (i.e., boosting EPS) rather than managerial optimism (i.e., signaling undervaluation). Further, ASR announcements are not followed by an increase in operating performance. There is also no evidence of positive long-run abnormal stock performance during the post-ASR period. The results suggest that managers use ASRs along with positive discretionary accruals to manage reported EPS rather than to signal their favorable private information about firms’ prospects.
The second essay examines the relation between firms’ financial constraints and their financial reporting during periods when they attempt to raise equity capital. Specifically, I investigate whether financially constrained firms tend to manage their earnings more aggressively around SEOs as compared to financially unconstrained firms. By using different measures of financial constraints, I document that constrained issuers, which cannot credibly signal the absence of aggressive earnings management, report higher income-increasing accruals than unconstrained issuers. I also find that investors correctly conjecture this greater earnings inflation and adjust issuers’ stock prices accordingly at the time of the offering. The evidence suggests that the aggressive earnings management by constrained issuers is not simply the result of managerial opportunism but rather a rational response to anticipated market behavior at offering announcements
