Earnings management as an explanation of the equity issue puzzle

Resumen

The poor stock price performance of firms that raise capital through seasoned equity offerings is one of the recent puzzles in financial literature. In this study we investigate whether pre-issue earnings management can explain these results for rights issues in Spain. Consistent with this explanation, we notice that firms' issuing rights make use of discretionary accruals to report higher earnings prior to the offering. Most interestingly, the decrease in discretionary accruals the years following the offering explains the underperformance in stock returns.