A Test of the Signaling Value of IPO Underpricing with REIT IPO-SEO Pairs

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firms true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings, however.     

Can media deter management from manipulating earnings? Evidence from China

This study examines the influence of media exposure on managers’ earnings management behavior using China’s publicly traded firms during 2001–2009. We find that firms with more media exposure (both negative and non-negative) manage their earnings less than firms with less media exposure. We also find that “suspect firms” (being specially treated or with refinancing plans like seasoned equity offerings or right offerings) with more media exposure engage in more accrual-based earnings management relative to other firms. These results suggest that Chinese media serve as an external monitor to the majority of firms and place excessive pressure on suspect firms. This paper contributes incrementally to the literature by emphasizing the conflicting role media exposure plays in managerial decisions in earnings management. The findings of this study have practical implications for regulators, auditors, financial analysts, as well as other information intermediaries.     

Do REITs Manipulate Their Financial Results Around Seasoned Equity Offerings? Evidence from US Equity REITs

This study addresses two questions: Is there earnings management in the REIT industry around seasoned equity offerings (SEO)? How is earnings management affected by financial and governance factors? Discretionary accruals methods are used to measure earnings management. In addition, the difference between actual and calculated FFO is used to capture the potential FFO manipulation. We examine how these manipulation measures change in the five quarters around SEOs. Moreover, we investigate how a REIT’s earnings management decision is affected by its financial structure, operating style, external auditor and corporate governance. We find clear evidence of FFO manipulation around SEOs, but the extent of earnings management is relatively weaker. We find that REITs issuing SEOs more often are more aggressive in manipulating FFO than earnings. Moreover, there is a notable difference between these two types of financial results manipulation. A mean-reversion trend is found in discretionary accruals, but not for FFO manipulation. Manipulation in financial results is influenced by various factors. A diminished capability to generate cash flow, high leverage, volatile cash flow, frequent SEOs and slack corporate governance are all the features of REITs more likely to manipulate financial results.     

SEASONED EQUITY OFFERINGS FOR NEW INVESTMENT AND THE INFORMATION CONTENT OF INSIDER TRADES

Significant negative valuation effects are widely acknowledged for firms announcing seasoned equity offerings. This result is consistent with theoretical models linking new equity issues to increased adverse-selection costs, lower management ownership in the firm, misuse of free cash flow, or expectations for earnings declines. Also increasingly evident, insiders trade around corporate announcements. We test the hypothesis that insider trading and announcements of new equity issues serve as joint signals in the market's evaluation of prospective capital investment projects. Our findings are consistent with the hypothesis that insider trading is related to market reaction to announcements of new equity issues.     

Gauging the effects of stock liquidity on earnings management: Evidence from the SEC tick size pilot test

This paper studies whether stock market liquidity has a causal effect on real earnings management. We introduce a new and cleaner identification of liquidity shock - the 2016 Tick Size Pilot Program - to show that firms with less liquid stocks are more likely to engage in real earnings management. We provide direct evidence that stock liquidity helps to deter real earnings management via enhancing governance by long-term institutional investors through trading and direct intervention, and via facilitating short selling to discipline managers. The effect is stronger in firms that do not pay dividends.     

Stock splits, trading continuity, and the cost of equity capital

We hypothesize that managers use stock splits to attract more uninformed trading so that market makers can provide liquidity services at lower costs, thereby increasing investors’ trading propensity and improving liquidity. We examine a large sample of stock splits and find that, consistent with our hypothesis, the incidence of no trading decreases and liquidity risk is lower following splits, implying a decline in latent trading costs and a reduced cost of equity capital. Further, split announcement returns are correlated with the improvements in both liquidity levels and liquidity risk. Our analysis suggests nontrivial economic benefits from liquidity improvements, with less liquid firms benefiting more from stock splits.     

Seasoned Equity Offerings: Stock Market Liquidity and the Rights Offer Paradox

This paper examines the impact of market liquidity on seasoned equity offerings (SEO) characteristics in France. We find that, besides blockholders’ takeup, liquidity is an important determinant of SEO flotation method choice. We document higher direct equity offering flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. After controlling for endogeneity in the choice of SEO flotation method, we find that pure public offerings and standby rights are comparable in terms of direct costs and liquidity improvement. Our results provide new insights as to why firms choose public offerings despite apparently higher costs.     

Disclosure frequency and earnings management

We examine the relation between disclosure frequency and earnings management, and the impact of this relation on post-issue performance, for a sample of seasoned equity offerings (SEOs). We contend that firms with extensive disclosure are less likely to face information problems, leading to less earnings management and better post-issue performance. Our results confirm that disclosure frequency is inversely related to earnings management and positively associated with post-issue performance. We also find that transparency-reducing disclosure is concentrated in firms that substantially, but temporarily, increase disclosure prior to the offering. Such firms exhibit more earnings management and poorer post-SEO stock performance, on average.     

Policy uncertainty and seasoned equity offerings methods

Based on a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we examine how the choice of equity issuance method changes in response to policy uncertainty. We find that firms subject to high policy uncertainty are less likely to use accelerated offerings rather than other types of traditional seasoned equity offerings. Our results are robust to alternative variable specifications, propensity score matching method, IV approach, and the inclusion of additional controls. Also, the effect of policy uncertainty on accelerated offering decision is weaker for firms with better information environment, earnings quality, and governance structures. Further, policy uncertainty increases the cost of funds and lowers long-run abnormal returns after SEOs for firms subject to high levels of policy uncertainty.     

Seasoned equity offerings: Quality of accounting information and expected flotation costs

Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev [2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59] earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher flotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.     

Management Quality and Equity Issue Characteristics: A Comparison of SEOs and IPOs

We use hand-collected data on the management quality of firms making seasoned equity offerings (SEOs) or initial public offerings (IPOs) to analyze the relationship between management quality and equity issue characteristics, and to compare the effect of management quality on SEOs versus IPOs. We hypothesize that higher quality managers are more credible to equity market investors, thereby reducing the information asymmetry they face in the market and outsiders’ information production costs. Therefore, the equity issues of higher management quality firms will have more reputable underwriters, smaller underwriting spreads, and other expenses, and smaller SEO discounts. Further, since better managers will be able to select better projects, higher management quality firms will have larger offer sizes. Finally, since SEO firms are likely to suffer from less information asymmetry compared to IPO firms, these effects will be smaller for SEOs than for IPOs. Our findings support the above hypotheses. Our direct tests of the relationship between management quality and information asymmetry, and our comparison of information asymmetry in SEOs versus IPOs provide further support for these hypotheses.     

What is the Relationship Between REIT Governance and Earnings Management?

The empirical corporate finance literature claims that better corporate governance constrains earnings management, while others argue that the unique legal and reporting structure of REITs may reduce the need for such internal corporate governance. Using a sample of publicly traded REITs for the 2004–2008 time period, we examine the relationships amongst corporate governance, accruals earnings management, manipulation of Funds from Operations (FFO), and real earnings management. We find that corporate governance quality is unrelated to accruals earnings management and manipulation of FFO. At first glance, the findings suggest that managers need less internal oversight because of the more transparent reporting structure of REITs. However, we document that REITs engage in significant real activities manipulation for earnings management purposes. Our empirical findings further show that corporate governance characteristics, in particular board size, independence, number of board meetings and audit committee financial expertise, are essential for constraining such activities. Finally, by focusing on a subset of REITs that act in ways which previous research has identified as more susceptible to earnings management activities, we demonstrate that good corporate governance effectively reduces accruals earnings management and manipulation of FFO for these REITs. Overall, our findings indicate that, despite the unique legal and reporting structure, REITs engage in certain forms of earnings management, and that the ability for REITs to manipulate earnings is reduced when corporate governance is more effective.     

The market-adjusted investment performance of ADR IPOs and SEOs

Initial public and seasoned equity offerings of American depositary receipts (ADRs) yield significantly positive market-adjusted returns both in early trading and over the longer run. This is in sharp contrast with the long-term performance of initial public offerings and seasoned equity offerings of common stocks in general. In addition, ADRs from emerging markets outperform those originating from developed countries, and those listed on the New York Stock Exchange generate higher after-market returns than those trading on the American Stock Exchange or the National Association of Security Dealers Automated Quotation System.     

董事高管责任保险、权益资本成本与上市公司再融资能力

基于公司治理角度,使用2002~2012年沪深引进董事高管责任保险的上市公司为样本,考察了董事高管责任保险、权益资本成本和上市公司再融资能力三者之间的相互关系。研究表明：董事高管责任保险与上市公司的再融资能力负相关,与权益资本成本呈显著正相关关系;权益资本成本在董事高管责任保险和上市公司再融资能力影响机制中发挥中介作用。具体地,投资者因规避责任保险机制庇护下公司高管自利行为可招致的风险,导致上市公司权益资本成本增加,从而降低了公司再融资能力。     

Earnings Management Surrounding New Debt Issues

We examine whether firms manage earnings before issuing bonds to achieve a lower cost of borrowing. We find significant income‐increasing earnings management prior to bond offerings. We also find that firms that manage earnings upward issue debt at a lower cost, after controlling for various bond issuer and issue characteristics. Our results are consistent with studies that report earnings management around equity issuance. The results indicate that, like equity holders, bondholders fail to see through the inflated earnings numbers in pricing new debt.     

Accounting flexibility and managers’ forecast behavior prior to seasoned equity offerings

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.     

Risk dynamics surrounding the issuance of convertible bonds

This paper analyzes the risk dynamics surrounding convertible bond offerings (CBOs) and Seasoned Equity Offerings (SEOs). As convertible bonds are commonly believed to be very effective at mitigating adverse selection or overinvestment problems we would expect differing risk and return patterns for convertible bond and seasoned equity issuers. By analyzing 1148 convertible bond offerings and comparing them to 2905 seasoned equity offerings, we show however that for both issuer types the systematic risk increases prior to issuance and drops sharply thereafter. This result is consistent with the notion of exercising real options, as growth options are always riskier than the underlying assets and exercising them at issuance causes an immediate drop in risk. The real option framework and the proposed dynamics of systematic risk also provide a rational explanation for the negative announcement effect, as well as any long-term underperformance subsequent to the CBO and the SEOs.     

Market liquidity as a sentiment indicator

We build a model that helps to explain why increases in liquidity—such as lower bid–ask spreads, a lower price impact of trade, or higher turnover–predict lower subsequent returns in both firm-level and aggregate data. The model features a class of irrational investors, who underreact to the information contained in order flow, thereby boosting liquidity. In the presence of short-sales constraints, high liquidity is a symptom of the fact that the market is dominated by these irrational investors, and hence is overvalued. This theory can also explain how managers might successfully time the market for seasoned equity offerings, by simply following a rule of thumb that involves issuing when the SEO market is particularly liquid. Empirically, we find that: (i) aggregate measures of equity issuance and share turnover are highly correlated; yet (ii) in a multiple regression, both have incremental predictive power for future equal-weighted market returns.     

Liquidity dynamics across public and private markets

In this paper we investigate cross-asset liquidity between equity markets and REITs and between REITs and private real estate markets. While many studies have investigated REIT liquidity, and there is an emerging interest in liquidity in the private real estate markets, there appears to be little knowledge of the dynamics of cross-market liquidity. We find lower levels of liquidity for REITs compared to a set of control firms matched on size and book-to-market ratios. Commonality in liquidity is also lower for REITs than the controls and the overall market. However, we do find an important difference in share turnover for REITs, which appears to have a higher level of commonality than found in other studies. We suggest that this may be due to the financial crisis. Additionally we find evidence of similar time-series variation in liquidity for public and private real estate markets. We also find significant directional causality for most liquidity proxies from the public to private real estate markets. Finally our results show that there is strong contemporaneous correlation between both public and private real estate market liquidity and the term spread and real investment and consumption spending. REIT liquidity measures based on intraday data also appear to contain important information not found in measures constructed from daily returns.     

Do Alternative Real Estate Investment Vehicles Add Value to REITs? Evidence from German Open-ended Property Funds

Besides the more commonly used REITs, German investors can also invest in a lesser-known real estate vehicle, Open-ended Property Funds. OPFs are considered a compromise between listed and direct real estate investments. OPF fund managers generally provide daily (perfect) liquidity. However, if liquidity falls below 5%, share redemptions in these funds can be temporarily suspended for a period of up to two years. During this time, investors will only be able to sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to analyze whether OPFs add value to investor portfolios above that provided by REITs. We show that OPFs have a diversification advantage over REITs in low-risk portfolios, despite their larger potential liquidity risk. REIT liquidity is comparable to that of ordinary common stock, but OPFs exhibit an average initial discount to funds’ NAV of about 6% when share redemptions are temporarily suspended. However, in the long-run, this potential redemption suspension does not negatively influence OPF performance (in case OPFs reopen again). This makes OPFs an attractive investment alternative to REITs for investors who have a high level of risk aversion and a long-term investment horizon, such as endowments, insurance companies, and pension funds.