ARTICLE IN PRESS
Journal of Accounting and Economics 50 (2010) 2–19

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Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae

Accrual-based and real earnings management activities around seasoned equity offerings
Daniel A. Cohen 1, Paul Zarowin Ã
New York University, Stern School of Business, NY 10012-1118, USA

a r t i c l e i n f o

abstract

Article history:
Received 15 January 2008
Received in revised form
22 December 2009
Accepted 18 January 2010
Available online 2 February 2010

We show that SEO firms engage in real activities manipulation, and the decline in postSEO performance due to the real activities management is more severe than that due to accrual management. Our evidence is important, because it shows that post-SEO operating underperformance is driven not just by accrual reversals, but also reflects the real consequences of operational decisions made to manage earnings. We also show how firms’ choices of real versus accrual-based earnings management activities around
SEOs vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so.
& 2010 Elsevier B.V. All rights reserved.

JEL Classification:
G14
G32
M4
M41
Keywords:
Seasoned equity offerings
Earnings management
Accounting choices
Accounting Accruals
Real activities

1. Introduction
In this paper, we examine both real and accrual-based earnings management activities around seasoned equity offerings (SEOs). Prior research has documented that SEOs are associated with earnings management and subsequent declines in operating performance (e.g., Rangan, 1998; Teoh et al., 1998; Shivakumar, 2000; DuCharme et al., 2004). These studies focused exclusively on accrual-based manipulation, and they attributed the post-SEO performance decline primarily to