Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 Earnings Timeliness and Seasoned Equiy Offering Announcemen Effec Yuequan Wang School of Accouning and Finance The Hong Kong Polyechnic Universiy Hong Kong Absrac This paper examines he relaion beween he Seasoned Equiy Offering (SEO) announcemen effec and earnings imeliness. I predic ha firms wih greaer earnings imeliness end o have less informaion asymmery beween managers and invesors, hus decreasing he magniude of he price drop a he SEO announcemen. As anicipaed, I find ha SEO negaive announcemen effec varies inversely wih earnings imeliness. Key words: Earnings imeliness; seasoned equiy offering; financial reporing qualiies; Informaion asymmery JEL Classificaion: D8, G14, M41 1. Inroducion This paper examines he relaion beween he Seasoned Equiy Offering (SEO) announcemen effec and earnings imeliness. I predic and es he hypohesis ha firms wih greaer earnings imeliness have less negaive SEO announcemen-period reurns. My hypohesis builds on he heory ha he sock price drop a an equiy issue announcemen is caused by informaion asymmery beween managers and invesors (Myers and Maluf 1984) and on he empirical sudies abou earnings imeliness by Bushman e al. (004) and Ball e al. (008). In he world of informaion asymmery, raional firm managers will no issue new socks when prices are low relaive o managers privae informaion abou firm value. Knowing his, invesors view an SEO announcemen as a negaive signal ha reveals managers percepions on a firm s curren sock price. Invesors respond o his negaive signal by reducing he sock price significanly. Measured as he adused R from a regression of annual earnings on conemporaneous sock reurns, earnings imeliness describes he abiliy of earnings numbers o capure curren value-relevan informaion. Because earnings are imporan o invesors in assessing firm performance and earnings wih greaer imeliness capure firms informaion in a more efficien way, greaer earnings imeliness can reduce informaion asymmery beween managers and invesors. The above analysis suggess ha earnings wih greaer imeliness can reduce informaion asymmery beween managers and invesors and ha less informaion asymmery implies a less negaive SEO announcemen effec. Thus, I hypohesize ha he marke responds less negaively o SEO announcemens from firms wih greaer earnings imeliness. I es he above hypoheses on a sample of SEO evens from 1984 o 006, requiring ha he sample firms have enough ime-series daa o compue a firm-specific measure of earnings imeliness. In order o calculae he announcemen-period reurn, I also require ha he sample firms have CRSP daily sock reurns during he SEO announcemen period. Finally, I regress he SEO announcemen-period reurn on he earnings imeliness and find ha he firms wih greaer earnings imeliness experience less negaive SEO announcemen reurn. In an addiional es, I explore wheher he impac of earnings imeliness on he SEO announcemen effec would be subsumed by oher earnings aribues. I reexamine he relaion beween he SEO announcemen effec and earnings imeliness wih oher earnings aribues in he regression. As in Lee and Masulis (009), I find ha accrual qualiy is negaively correlaed wih he magniude of sock price drop a he SEO announcemen. Bu he significan influence of earnings imeliness on he SEO announcemen effec sill holds when all oher earnings aribues are considered. This suggess ha earnings imeliness has a unique and irreplaceable impac on he sock reurn a he SEO announcemen This sudy makes several conribuions. Firs, accouning researchers have long been ineresed in he causes and consequences of financial reporing qualiies. This paper conribues o he lieraure abou he consequences of financial reporing qualiies by examining he effecs of earnings imeliness in a financing even. 55
The Special Issue on Conemporary Research in Social Science Cenre for Promoing Ideas, USA Thus, in a broader sense, aken ogeher wih oher sudies ha address he roles of financial reporing qualiies on invesmen efficiency, deb conracing efficiency or sock price synchroniciy (e.g., Biddle e al. 009; Zhang 008; Huon e al. 009), my paper enriches he lieraure and fills a need by examining he effec of earnings imeliness in he financing even. Second, my paper provides empirical evidence on he relaion beween earnings aribues and firms informaion environmens. Francis e al. (004) sudy he relaion beween earnings aribues and informaion risk. However, informaion risk is difficul o measure and he causal chain beween hese aribues and informaion risk involves many links and assumpions. This sudy proposes ha informaion asymmery can serve as one link beween earnings aribues and informaion risk because informaion asymmery increases invesors uncerainy regarding firms and informaion risk is, hus, posiively correlaed wih informaion asymmery. Sudying he link beween earnings aribues and measures of informaion asymmery can enhance our confidence ha hese qualiy measures are causally linked o characerisics of firms informaion environmens. Third, his paper enriches he curren, limied lieraure abou earnings imeliness. By measuring he exen o which curren earnings numbers capure value-relevan informaion, earnings imeliness plays imporan roles in capial marke. However, only a few papers conduc research on earnings imeliness. Ball e al (008) explore he deb conracing value of earnings imeliness. Bushman e al. (004) invesigae how earnings imeliness affecs corporae governance facors such as board srucure. Francis e al. (004) examine he relaion beween he cos of equiy capial and earnings aribues, including earnings imeliness. My paper is he firs o explore he impac of earnings imeliness on he ransacion coss of an equiy offering. Finally, his paper also conribues o he lieraure seeking o explain he cross-secional variaion in announcemen-period reurn and is among he firs o examine wheher earnings aribues can be used o proxy he informaion asymmery and describe he informaion environmen. The remainder of his paper is organized as follows: Secion reviews prior research concerning he SEO announcemen effec; Secion 3 discusses he role of earnings imeliness in influencing informaion asymmery and develops he hypoheses; Secion 4 inroduces he sample and research design; Secion 5 presens empirical resuls; Secion 6 supplies a summary and conclusion.. Lieraure Review Seasoned Equiy Offerings (SEO) refer o he even during which a publicly raded firm issues addiional sock. The SEO is a kind of primary offering because he firm issues new shares and he proceeds go o he firm. This is as opposed o a secondary offering, during which corporae insiders and block-shareholders sell shares while he number of shares ousanding remains he same afer he offering. I is well-documened ha he announcemen of a common sock offering engenders a significan sock-price drop in he magniude of beween -% and -3% (Masulis and Kowar 1986; Asquih and Mullins 1986; Mikkelson and Parch 1986). Such a negaive SEO announcemen effec reflecs he large ransacion coss of he new issues. Researchers sugges differen heories o explain his phenomenon. Leland and Pyle (1977) show ha, in markes wih asymmeric informaion, he equiy fracion in he proec reained by he self-ineresed enrepreneur has a posiive associaion wih a fuure proec s qualiy. Wellinformed managers would only sell heir sock shares when hey believe ha he shares are overvalued. So, share sales by managers serve as a negaive signal abou a firm s inrinsic value. The Leland and Pyle signaling heory applies o pure primary offerings and o a combinaion of secondary offerings and primary offerings because secondary offerings decrease he insiders or block-shareholders shares. Myers and Maluf (1984) ake heir findings beyond hose of Leland and Pyle. In heir adverse selecion model, hey assume ha managers always work for he ineress of exising shareholders and will no issue socks when he firm is undervalued, because doing so would dilue he fracional ownership of exising shareholders. Thus, even when managers do no sell heir own shareholdings, he mere ac of equiy offering conveys a negaive signal ha he curren sock price is oo high. Knowing his, raional invesors adus heir valuaion of a firm and he sock price drops as a consequence. The Myers and Maluf adverse selecion model applies o all kinds of offerings: primary offerings, secondary offerings and a combinaion. Jung, Kim and Sulz (1996) propose a heory based on agency problems, claiming ha when managemen has misaligned ineress wih he shareholders, raional invesors respond o he equiy offering announcemen negaively because hey are afraid of poenial misuse of proceeds. 56
Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 A subsanial volume of lieraure also ries, wih carrying findings, o explain he cross-secional variaion in he SEO announcemen-period reurns. For example, some researchers examine wheher equiy characerisics conribue o cross-secional variaion and find mixed resuls in he relaion beween he relaive size of he offering and he subsequen drop. Asquih and Mullins (1986) documen ha announcemen-period reurn is negaively relaed o he relaive size of he issue, compued as he raio of he planned proceeds o a firm s equiy value before he announcemen. Dierkens (1991), however, does no find a significan relaion beween he price drop and he relaive size of he issue, measured as he raio of he number of new shares o he number of shares ousanding before he announcemen. Mikkelson and Parch (1986) also do no find a relaion beween he sock price effecs and he amoun of new financing or he size of offering. Use of proceeds is anoher characerisic of an offering ha can explain cross-secional variaion in he announcemen reurns o some exen. Mikkelson and Parch (1986) documen a less negaive announcemen effec when i is saed ha he proceeds are o be used for capial expendiures, raher han for deb refinance. Asquih and Mullins (1986) examine wheher a firm s pre-issue performance can be a facor used o explain cross-secion variaion in an SEO announcemen reurn. They find ha such announcemen-period reurn is posiively relaed o he previous eleven-monh cumulaive excess reurn. Masulis and Korwar (1986) documen a negaive relaion of sock announcemen reurn o he previous wo-monh firm reurn and a posiive relaion of sock announcemen reurn o he previous wo-monh marke reurn. In erms of he iming of an announcemen, Choe, Masulis, and Nanda (1993) documen a less negaive SEO announcemen effec when he economy is in an expansionary period of he business cycle, which implies less adverse selecion risk. Dierkens (1991) documens a significanly posiive relaion beween he announcemenperiod reurn and he firm s growh opporuniies, he raio of he marke value of he equiy o he book value of he equiy for one fiscal year before he announcemen. Lang and Lundholm (000) find by examining firms behavior paerns ha issuing firms end o reduce he informaion asymmery by making opimisic disclosures more frequenly, saring six monhs before he regisraion dae, and ha he announcemen-period reurn increases wih such changes in firms disclosure behavior. Koraczyk,Lucas, and McDonald (1991) repor ha he negaive announcemen effec is less pronounced wih a decrease in he ime difference beween he offering announcemen and he preceding earnings announcemen. They argue ha a decrease in he informaion asymmery resuling from he earnings announcemen reduces he magniude of he price drop a he offering announcemen. Wih regard o CEO compensaion srucure, Brazel and Webb (006) documen ha when he proporion of CEO equiy-based compensaion is large, invesors end o view he equiy offering as a las-resor source of capial and respond o he SEO announcemen effec more negaively. In his paper, I examine wheher firms wih earnings imeliness of differen magniude experience differen price drops during he SEO announcemen period. My sudy will no only enrich he lieraure regarding he consequences of financial reporing qualiies, bu will also provide a poenial link, informaion asymmery, o he argued relaion beween earnings aribues and informaion risk. Of course, he paper will also conribue o lieraure ha explains he cross-secional variaion in he SEO announcemen-period reurn and lieraure abou earnings imeliness. 3. Hypohesis Developmen Earnings are imporan sources for invesors o assess firm performance. Measured as he adused R of he firmspecific regression of annual earnings on annual reurns (Equaion 1), earnings imeliness is one measure of financial reporing qualiy and one of he hree marke-based earnings aribues in Francis e al. (004). E, b,0 b,1neg, b,ret, b,3neg, RET,, (1) MKTCAP, 1 In Equaion 1, E, is he earnings before exraordinary iems, disconinued operaions and special iems for a given firm in fiscal year ; MKTCAP, 1 is he marke capializaion a he end of fiscal year -1; RET, is he sock reurn of firm from nine monhs before he end of fiscal year o hree monhs afer he end of fiscal year ; 57
The Special Issue on Conemporary Research in Social Science Cenre for Promoing Ideas, USA NEG, is a dummy variable equal o 1 if, he adused 58 RET is negaive and 0 oherwise. Earnings imeliness, TL, is equal o R. Larger values of TL correspond o greaer earnings imeliness. Sock prices aggregae all publicly available informaion abou firm value. Accouning numbers provide more deailed informaion abou he sources of firm-value changes by gahering, classifying and summarizing he financial effecs of firms invesmen, operaing and financing aciviies (Bushman e al., 004). Timely and precise accouning numbers, including earnings, can help even less sophisicaed invesors exrac he underlying informaion from sock prices and help hem o undersand equiy values changes beer. Therefore, imely and efficien accouning numbers provide cleaner and less noisy informaion, enabling ouside invesors o monior firm performance, hus, improving he ransparency of he operaions and aciviies of he firm o ouside invesors. Earnings imeliness records he inheren abiliy of curren earnings o capure value-relevan informaion in a imely fashion. The greaer imeliness (higher adused R ) implies ha he earnings have he abiliy o capure new informaion in a more efficien manner. The presenaion of earnings numbers is, herefore, more informaive and highly qualiaive o ouside invesors and will decrease he informaion asymmery beween managers and invesors. Among he few papers ha alk abou earnings imeliness, Ball e al. (008) explore he deb conracing value of earnings imeliness. Bushman e al. (004) invesigae how earnings imeliness affecs corporae governance facors, such as board srucure. Francis e al. (004) examine he relaion beween he cos of equiy capial and earnings aribues, including earnings imeliness. I argue in his sudy ha greaer imeliness also has implicaions in capial raising evens because i miigaes poenial adverse selecion problems in SEO evens and lead o a less negaive SEO announcemen effec. Hypohesis: Ceeris paribus, negaive SEO announcemen effec is less for firms wih greaer earnings imeliness. 4. Daa and Research Design 4.1 Sample selecion I collec he iniial SEO samples from 1984 o 006 from he Securiies Daa Company s (SDC s) New Issue Daabase. The offerings consis of pure primary offerings or a combinaion of primary and secondary offerings. I require he samples o be common socks lised on NYSE, NASDAQ, or AMEX. I exclude: 1) limied parnership; ) righ s issue; 3) uni issues; 4) closed-end fund; 5) SEOs lacking informaion abou filing dae, issue dae, offer price, shares filed, filing amoun; 6) SEOs wih offer prices less han $5; 7) SEOs wih more han one issue for he same filing; 8) SEOs wih a lag in issue dae as compared o he filing dae < 5 days or > 60 days. I use his resricion because shor ime differences beween he filing dae and issue dae imply mixed sock responses during boh announcemen period and issue period. Also, if he filing dae is much earlier han he issue dae, hen his may no mean ha managers hink ha he sock price (on he filing dae) is overvalued; 9) SEOs lacking CRSP daily sock reurns/prices around he SEO filing dae; and 10) SEOs wihou a one-o-one correspondence beween CUSIP in SDC and idenifier in COMPUSTAT/CRSP. 4. Filing dae and announcemen dae Because of daa availabiliy, I use he filing daes in he SDC new issue daabase for he announcemen daes. This reamen is consisen wih some of he previous sudies (Clarke e al., 001; Denis, 1994). My argumen is ha he rue SEO announcemen releases informaion abou fuure issuances and laer SEO filing furher confirms he fuure issuance so he sock price also drops a he filing dae. Considering he fac ha informaion abou equiy offerings would likely have leaked o some exen prior o he announcemen dae, using a filing dae o proxy he announcemen dae may underesimae he adverse relaion beween earnings imeliness and SEO announcemen effec. 4.3 Dependen variable Referring o he filing dae as day 0, I define rading days -1, 0, and 1 as an even period and compue he cumulaive abnormal reurn (CAR) in his period as he dependen variable (Brown and Warner, 1985).
Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 I firs use OLS o esimae he marke model in order o compue he cumulaive abnormal reurns in he even period. R, 0, 1, RM,, =-180, -179,, -10 () AR, R, ˆ0, ˆ 1, RM, =-1, 0, 1 (3) M o d_ el CAR ( R R (4) 1,0,1, M, ) The esimaion period is from rading day -180 o rading day -10. The CRSP equally weighed index is used as he marke reurn R M,. R, is firm s raw reurn on day. ˆ 0, and ˆ 1, are esimaed coefficiens from he esimaion period. AR, is he abnormal reurn of firm on day. Dependen variable, cumulaive abnormal reurn Model _ CAR, is he sum of abnormal reurns in he even period. In he sensiiviy es, I also use he marke-adused reurns in he even period o obain he cumulaive abnormal reurn. AR, R, RM, =-1, 0, 1 (5) Ad u sed _ CAR AR, (6) 1,0,1 Adused _ CAR is he sum of marke adused reurns in even period. 4.4 Conrol variables Conrol variables I consider are as follows: Offer size (REL_SIZE, ABS_SIZE): The size of he equiy offering measures he size of he negaive informaive signal. The relaive size of he issue, REL_SIZE, is compued as he number of filing shares o he number of shares ousanding (Compusa #5) before SEO announcemen. The absolue size of he issue, ABS_SIZE, is he log of filing proceeds. Alhough heories of informaion asymmery and he alernaive models based on he opimal capial srucure predic ha an increase in he size of he issue will increase he magniude of he price drop (Smih, 1986), prior empirical work finds mixed resuls (Asquih and Mullins, 1986; Mikkelson and Parch, 1985). I ry boh relaive offer size and absolue offer size in my empirical ess and find ha absolue offer size has a significanly negaive relaion wih SEO announcemen-period reurn. Firm size (FIRM_SIZE): FIRM_SIZE is compued as he naural logarihm of oal asses (Compusa #6). A larger firm is usually followed by more analyss and has more media aenion. Therefore, he informaion asymmery beween managers and invesors is less for a larger firm han for a smaller firm (Lee and Masulis, 007). So, I predic ha large firm experiences less price drop a SEO announcemen. Invesmen opporuniies (MTB): I use marke-o-book raio, MTB, as he proxy of invesmen opporuniies (Jung e al., 1996). MTB is compued as ( [Compusa #199 * Compusa #54 +Compusa #6 - Compusa #60] / [Compusa #6] ). A higher MTB implies ha he firm has more inangible asses and greaer informaion asymmery and ends o have more profiable invesmen opporuniies. Invesors end o inerpre he announcemen of equiy issues from firms wih higher MTB as reflecing he need o fund fuure promising proecs and he reducion of he informaion asymmery abou fuure invesmen opporuniies. Therefore, I predic a significan posiive coefficien on his variable. 4.5 Tess of hypohesis I hypohesize a posiive relaion beween he SEO announcemen-period reurn and earnings imeliness (i.e., a negaive relaion beween he SEO announcemen effec and earnings imeliness). I es he hypohesis by esimaing he following model: CAR 0 1 TL OFFER _ SIZE (7) FIRM _ SIZE MTB 3 4 59
The Special Issue on Conemporary Research in Social Science Cenre for Promoing Ideas, USA TL is he value of firm s earnings imeliness. OF F E R_ S IZ E is he issue s size. I es boh relaive offer size and absolue offer size in he regression. FIRM_ SIZE is he naural log of he oal asses of he SEO firm. Marke-o-book raio, MTB, describes he growh opporuniies of firm. 60 I close his secion by addressing wo poenial selecion bias issues wih my empirical design. Firs, as discussed above, I sample only firms ha issued new socks. Bias may resul if firms ha decide o issue SEOs insead of deb are hose wih greaer or less earnings imeliness. As an illusraion, I compare he earnings imeliness of he sample firms wih ha of firms in Francis e al. (004) and find ha SEO firms end o have significanly smaller earnings imeliness values han hose repored by Francis e al. (004). SEO firms, hen, end o be more opaque han non-seo firms. Second, selecion bias may resul because ime-series calculaions require he use of firms wih a minimum number of survival years before SEO evens. Thus, he sample firms end o be large and successful firms. Large and successful firms end o be more ransparen han small and young firms. 5 Empirical Resuls 5.1 Descripive saisics Table 1, Panel A presens he descripive saisics of he cumulaive abnormal reurn in SEO announcemen period. The average sock reurn a 3045 SEO announcemen is from around -% o -3%, depending on he mehod used o calculae he CAR. To obain earnings imeliness, I furher require a leas 6 yearly daa poins from 8 years prior o he SEO filing dae o 1 year prior o he SEO filing dae. Using OLS, I obain earnings imeliness (TL) from Equaion 1 in Secion 3. In order o reduce he effecs of ouliers, I exclude he observaions in he op or boom 1% of dependen and independen variables in each equaion. Descripive saisics of earnings imeliness can be found in Panel B, Table 1. The earnings imeliness measure, TL, has a mean (median) value of 0.109 (0.093). 5. Earnings imeliness vs. SEO announcemen-period reurn In order o reduce he effecs of ouliers, I exclude he observaions in he op or boom 1% of all available earnings imeliness and SEO announcemen-period reurn. The SEO sample consiss of 947 SEOs by 73 firms. Table presens he frequency disribuion of SEOs by filing year and he number of offerings per firm. Panel A shows ha SEOs were more frequen a he beginning of he 1990s. Panel B shows ha abou 80 percen of firms issue SEO only once. Table 3 provides evidence on wheher negaive SEO announcemen effec is less severe for firms wih greaer earnings imeliness. I run he regressions using marke-model-based CAR and marke-adused CAR as dependen variables, respecively. I firs sar from he base model ha includes only offer size, firm size and growh opporuniies. Columns 1 and 4 show ha here is no significan relaion beween he SEO announcemen-period reurn and he relaive offer size (REL_SIZE). Columns and 5 show a significan, negaive relaion beween SEO announcemen-period reurn and he absolue issue size (ABS_SIZE). Therefore, I use he absolue issue size, log of filing proceeds, as he proxy of offer size, hereafer. Columns 3 and 6 show ha earnings imeliness has a significan, posiive relaion wih SEO announcemen-period reurn. Using a differen calculaion of cumulaive abnormal reurns a he announcemen, he regressed coefficien is from 0.6% o 0.7%, wih a 10% or 5% significance level. This means ha firms reporing earnings in a more imely fashion experience less price-drops a he SEO announcemen. This resul is consisen wih he hypohesis. 5.3 Addiional ess In his secion, I examine wheher he impac of earnings imeliness on he SEO announcemen effec is unique and would no be subsumed by oher earnings aribues. To be specific, hese earnings aribues are accrual qualiy, persisence, predicabiliy, smoohness and value relevance. I do no compue firm-specific conservaism because many SEO firms do no have enough negaive annual reurns in he esimaion period o calculae conservaism. Accrual qualiy describes he effeciveness of curren accruals o map ino cash flows in prior, curren and subsequen periods (Dechow and Dichev, 00; Francis e al., 004). One measure of accrual qualiy is he negaive of he sandard deviaion of he residuals in he firm-specific regression of accruals on lagged, curren and fuure cash flows:
Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 TCA CFO CFO CFO (8a) Asses Asses Asses Asses,, 1,, 1 0, 1,, 3,,,,,, where TCA, is firm s oal curren accruals in year ; CFO, is firm s cash flow in year ; Asse, is he average of firm s oal asses beween fiscal year and -1. Accrual qualiy, AQ1, is equal o ( ˆ, ). McNichols (00) improves he model in Equaion 8a. He finds ha he explanaory power in cross-secional regressions is grealy improved by including deflaed changes in sales and deflaed propery, plan and equipmen. He proposes he model below: TCA CFO CFO CFO ' ' ' ' Asses Asses Asses Asses,, 1,, 1 0, 1,, 3,,,,, SALES PPE ' ' e,, 4, 5,, Asses, Asses, Accrual qualiy as defined in his model, AQ, is equal o ( e, ). Larger values of AQ1 (AQ) correspond o beer accrual qualiy. I include AQ as he measure of accrual qualiy in he regression o examine wheher earnings imeliness influence on he SEO announcemen period reurn would be suppressed by accrual qualiy. Greaer accrual qualiy, i.e., reduced variaion in he residual, indicaes ha earnings informaion provided by he firm is a more reliable measure of a firm s cash flow and performance, so higher accrual qualiy can increase informaion qualiy provided by earnings and decrease he informaion asymmery beween managers and invesors. Therefore, greaer accrual qualiy miigaes poenial adverse selecion problems in SEO evens and leads o a less negaive SEO announcemen effec (Lee and Masulis, 009). Value relevance measures he abiliy of earnings level and earnings change o explain he reurns (Francis e al., 004). One measure of value relevance is he adused R of he regression of annual reurns on conemporaneous earnings and changes in earnings. E, E, RET (9), 0, 1,, MKTCAP MKTCAP, 1, 1 In Equaion 9, E,, MKTCAP, 1and RET, are defined as Equaion 1 and E, as equals E, minus E, 1. Value relevance, VR, is equal o he adused R. Larger values of VR correspond o greaer value relevance. Francis e al. (004) define earnings smoohness (SMTH) as he negaive of he sandard deviaion of he deflaed earnings divided by he sandard deviaion of he deflaed cash flows. ( E, / Asses _ end, 1) SMTH (10) ( CFO / Asses _ end ),, 1 where E, and CFO, are he earnings and cash flows for firm in fiscal year ;, 1 asses a he end of fiscal year -1. Larger values of SMTH correspond o more earnings smoohness. (8b) Asses _ end is he oal The ime-series persisence of earnings describes he auocorrelaion beween pas earnings and fuure earnings, while he predicabiliy of earnings reflecs he abiliy of pas earnings o predic fuure earnings (Lipe, 1990; Francis e al., 004). One measure of earnings persisence is he auocorrelaion coefficien in AR(1) model for adused earnings and one measure of earnings predicabiliy is he sandard deviaion of he negaive of he sandard deviaion of he residuals in he AR(1) model for adused earnings. X X (11), 0, 1,, 1, 61
The Special Issue on Conemporary Research in Social Science Cenre for Promoing Ideas, USA where X, is firm s spli-adused earnings per share in fiscal year ; earnings persisence, PER, is equal o 1, and earnings predicabiliy, PRED, is equal o ( ˆ, ). Larger values of PER and PRED correspond o beer earnings persisence and greaer predicabiliy, respecively. In calculaing for each earnings aribue, I require a leas 6 yearly daa poins from 8 years prior o he SEO filing dae o 1 year prior o he SEO filing dae. Using OLS, I obain accrual qualiies (AQ), value relevance (VR) and smoohness (SMTH) from Equaions 8 hrough 10. Using a maximum likelihood mehod, I obain earnings persisence (PER) and predicabiliy (PRED) from he AR(1) model in Equaion 11. As in he calculaion of earnings imeliness, I exclude he observaions in he op or boom 1% of dependen and independen variables in my calculaion of each earnings aribue o reduce he effecs of ouliers. Table 1, Panel B presens descripive saisics of all earnings aribues. As discussed previously, earnings imeliness measure, TL, has a mean (median) value of 0.109 (0.093). In comparison, Francis e al. (004) repor a mean (median) value of 0.466 (0.465). The measure of value relevance, VR, has a mean (median) value of 0.14 (0.116), while Francis e al. (004) give a mean (median) value for value relevance as 0.43 (0.416). My resuls on accrual qualiy are comparable o hose repored by Francis e al. (004). This paern may arise from he self-selecion problems inheren in my research design. To review, all sample firms cied in my work are hose ha issue new shares. I is possible, hough, ha firms deciding o issue hese shares are also hose ha do no include value-relevan informaion in a imely manner or are hose wih earnings daa ha do no accoun for heir reurns well. In order o examine wheher oher aribues subsume earnings imeliness, I run he regression and examine wheher he coefficien and significance level of earning imeliness sill holds in he presence of he ohers: 6 CAR TL AQ VR EP FIRM_ S IZ E M T B PRED S M T H OFFER_ S IZ E (1) 5 8 0 1 6 9 7 3 I also exclude he observaions in he op or boom 1% of each earnings aribue and SEO announcemen-period reurn. The final sample consiss of 495 SEOs by 379 firms. Table 4 presens he frequency disribuion of SEOs by filing year and number of offerings per firm. Panel A shows ha SEOs are more frequen a he beginning of 1990s. Panel B shows ha abou 80% firms issue SEO only once. As in Lee and Masulis (009), Table 5 shows ha negaive SEO announcemen effec is less for firms wih beer accrual qualiy a he 5% level ( saisics:.34). No significan relaions are found beween he SEO announcemen effec and earnings persisence, earnings predicabiliy, value relevance or earnings smoohness. More imporanly, i also shows ha he effec of earnings imeliness on he SEO announcemen period reurn sill holds a he 5% level (coefficien: 1.53%; saisics:.45) when oher earnings aribues, including accrual qualiy, are considered, suggesing ha earnings imeliness capures is own dimension in he cos of financing aciviies. Table 5 shows ha boh accouning-based and marke-based financial reporing qualiies may affec SEO announcemen effec. However, i is necessary o poin ou ha, compared wih accouning-based earnings aribues, all marke-based measures have heir inheren limiaions in even sudies. Marke-based accouning aribues, such as earnings imeliness, value relevance and conservaism, are calculaed in he way ha he sock marke is regarded as being efficien. However, even sudies in SEO, earnings announcemens or merger and acquisiions, usually deal wih siuaions in which socks are overvalued or undervalued and invesors regard hese evens as signals ha reveal he rue value of sock prices. 6. Conclusions This paper examines wheher he fac ha a firm repors is earnings in a imely way affecs invesors responses a he ime of a firm s announcemen of is SEO financing decision. I find ha firms wih greaer earnings imeliness end o experience less price drops a SEO announcemens. The resuls presen evidence ha imely financial reporing can help invesors o assess firm performance by reducing he informaion asymmery beween managers and invesors. So, his paper conribues o lieraure abou he consequences of financial reporing qualiy. 4 ˆ
Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 This sudy provides empirical evidence on he relaion beween earnings aribues and a firm s informaion environmen and proposes ha informaion asymmery can be one link beween earnings aribues and informaion risk. This paper also enriches he scarce lieraure abou earnings imeliness. This sudy suggess wo poenial avenues for fuure research. Firs, i may be inriguing o examine wheher SEO firms end o be less ransparen firms and, hus, se up a link beween corporae governance and corporae invesmen decisions. Second, disinguishing primary offerings and secondary offerings may yield some ineresing opics. References Asquih, P., and D. W. Mullins Jr. 1986. Seasoned equiy offerings. Journal of Financial Economics 15: 61 89. Ball, R., R. Bushman, and F. Vasvari. 008. The Deb-Conracing Value of Accouning Informaion and Loan Syndicae Srucure. Journal of Accouning Research 46: 47-87. Basu, A. 1997. The conservaism principle and he asymmeric imeliness of earnings. Journal of Accouning and Economics 4: 3 37. Biddle, G., G. Hillary, and R. Verdi. 009. How does financial reporing qualiy relae o invesmen efficiency? Journal of Accouning and Economics 48: 11-131. Brazel J., and E. Webb. 006. CEO compensaion and he seasoned equiy offering decision. Managerial and Decision Economics 7: 363 378. Brown, S., and J. Warner. 1985. Using daily sock reurns: The case of even sudies. Journal of Financial Economics 14: 3-31. Bushman, R., Q. Chen, E. Engel, and A. Smih. 004. Financial accouning informaion, organizaional complexiy and corporae governance sysems. Journal of Accouning and Economics 37: 167 01. Choe, H., R. Masulis, and V. Nanda. 1993. Common sock offerings across he business cycle: Theory and evidence. Journal of Empirical Finance 1: 3 31. Clarke, J., C. Dunbar, and K. Kahle. 001. Long-run performance and insider rading in compleed vs. canceled seasoned equiy offerings. Journal of Financial and Quaniaive Analysis 36: 415-430. Dechow, P., and I. Dichev. 00. The qualiy of accruals and earnings: The role of accrual esimaion errors. The Accouning Review 77 (supplemen): 35 59. Denis, D. 1994. Invesmen opporuniies and he marke reacion o equiy offerings. Journal of Financial and Quaniaive Analysis 19: 159 177. Dierkens, Nahalie. 1991. Informaion asymmery and equiy issues. Journal of Financial and Quaniaive Analysis 6: 181 99. Francis, J., R. Lafond, P. M. Olsson, and K. Schipper. 004. Coss of equiy and earnings aribues. The Accouning Review 79: 967 1010. Huon, A.P., A.J. Marcus, and H. Tehranian. 009. Opaque financial repors, R, and crash risk. Journal of Financial Economics 94: 67-86. Jung, K., Y. Kim, and R. Sulz. 1996. Timing, invesmen opporuniies, managerial discreion, and he securiy issue decision. Journal of Financial Economics 4: 159 185. Koraczyk, R., D. Lucas, and R. McDonald. 1991. The effec of informaion releases on he pricing and iming of equiy issues. Review of Financial Sudies 4 (4): 685 708. Lang, M., and R. Lundholm. 000. Volunary disclosure and equiy offerings: reducing informaion asymmery or hyping he sock? Conemporary Accouning Research 17: 63-66. Lee, G., and R. Masulis, 009. Seasoned equiy offerings: qualiy of accouning informaion and expeced floaion coss. Journal of Financial Economics 9: 443-469. Leland, H., and D. Pyle, 1977. Informaion asymmeries, financial srucure, and financial inermediaion. Journal of Finance 3: 371 387. Lipe, R. 1990. The relaion beween sock reurns and accouning earnings given alernaive informaion. The Accouning Review 65: 49 71. Masulis, R. W., and A. N. Korwar. 1986. Seasoned equiy offerings: An empirical invesigaion. Journal of Financial Economics 15: 91 117. McNichols, M. 00. Discussion of he qualiy of accruals and earnings: The role of accrual esimaion errors. The Accouning Review 77 (supplemen): 61 69. Mikkelson, W., and M. Parch. 1986. Valuaion effecs of securiy offerings and he issuance process. Journal of Financial Economics 15: 31 60. Myers, S., and N. Maluf. 1984. Corporae financing and invesmen decisions when firms have informaion ha invesors do no have. Journal of Financial Economics 13: 187 1. Smih, C. 1986. Invesmen banking and he capial acquisiion process. Journal of Financial Economics 15: 3 9. Zhang, J. 008. The conracing benefis of accouning conservaism o lenders and borrowers. Journal of Accouning and Economics 45: 7-54. 63
The Special Issue on Conemporary Research in Social Science Cenre for Promoing Ideas, USA Table.1 Descripive saisics The iniial samples consiss of 3045 SEOs from 1984 o 006 lised on NYSE, NASDAQ, or AMEX and excludes: 1) limied parnership, ) righ s issue, 3) uni issue, 4) closed-end fund, 5) SEOs lacking informaion abou filing dae, issue dae, offer price, shares filed, filing amoun, 6) SEOs wih offer prices less han $5, 7) SEOs wih more han one issue for he same filing, 8) SEOs whose lag of issue dae compared o filing dae is smaller han 5, or larger han 60 9) SEOs lacking CRSP daily sock reurns for he hree rading days around SEO filings or from he prior 180 rading days o he prior 10 rading days, 10) SEOs wihou one-o-one correspondence beween CUSIP in SDC and idenifier in COMPUSTAT/CRSP. Model_CAR is he cumulaive abnormal reurn in he even period using he OLS marke model. Adused_CAR is he cumulaive marke-adused reurn in he even period. (Filing dae: day 0; even period: rading day -1, 0, 1; esimaion period: period from rading day -180 o rading day -10). For each earnings aribue s calculaion, a leas 6 years necessary financial saemens daa are required wihin 8 years prior o he SEO filing dae. Accrual qualiy has wo measures: AQ1 and AQ. AQ1 is equal o ( ˆ, ) in TCA CFO CFO CFO. Asses Asses Asses Asses,, 1,, 1 0, 1,, 3,,,,,, ( eˆ ) in AQ is equal o, TCA, CFO, 1 CFO, CFO, 1 SALES, PPE, ' 0, ' 1, ', ' 3, ' 4, ' 5, e., Asses Asses Asses Asses Asses Asses,,,,,, ˆ and ( ˆ, ) in Earnings persisence (EP) and predicabiliy (PRED) are measured as 1, X X, respecively., 0, 1,, 1, Earnings smoohness (SMTH) is measured as ( E / Asses _ end ),, 1. ( CFO / Asses _ end ),, 1 Value relevance (VR) and earnings imeliness (TL) are measured as he adused E, E, RET, 0, 1,, and SHARES P SHARES P E SHARES, P, 1, 1, 1, 1, 1, 1 b b NEG b RET b NEG RET,0,1,,,,3,,, R in TCA Toal curren accruals = CA - CL - Cash + STDEBT ( : change beween year -1 o year ); CA Curren asse (Compusa #4); CL Curren liabiliies (Compusa #5); Cash Cash and shor-erm invesmens (Compusa #1); STDEBT Deb in curren liabiliies (Compusa #34); CFO Cash flow from operaions = E TCA + depreciaion amorizaion (Compusa #14); Asses Average oal asses (Compusa #6) in year and year -1; Sales Sales (Compusa #1); Assess_end Toal asses a he end of fiscal year; PPE Propery, plan and equipmen (Compusa #7); X Spli-adused earnings per share (Compusa #58); RET Twelve-monh raw reurn ending hree monhs afer he end of fiscal year ; E Earnings before exraordinary iems, disconinued operaions, and special iems (Compusa #18); SHARES Common shares ousanding (Compusa #5); P Sock price fiscal year close (Compusa #199). 64.
Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 Table.1 Panel A: Descripive saisics of SEO announcemen period reurns Mean Sd. Dev. 10% 5% Median 75% 90% Model_CAR -0.084 0.0666-0.107-0.067-0.059 0.0054 0.0404 Adused_CAR -0.0194 0.0646-0.094-0.059-0.000 0.0113 0.0494 Panel B: Descripive saisics of earnings aribues N Mean Sd. Dev. 10% 5% Median 75% 90% AQ1 598-0.0317 0.073-0.0676-0.0453-0.040-0.0109-0.0053 AQ 573-0.036 0.036-0.0530-0.031-0.015-0.007-0.0037 EP 1106 0.59 0.3744-0.485-0.0106 0.87 0.541 0.74 PRED 1106-0.9950 1.0399 -.110-1.1936-0.6370-0.3603-0.166 SMTH 944-0.7438 0.443-1.51-0.9773-0.6956-0.4333-0.47 VR 950 0.144 0.364-0.330-0.1503 0.1164 0.4069 0.6540 TL 958 0.1086 0.4403-0.4437-0.05 0.0933 0.4450 0.784 65
The Special Issue on Conemporary Research in Social Science Cenre for Promoing Ideas, USA Table. Frequency disribuion The samples consiss of 947 SEOs by 73 firms from 1984 o 006 lised on NYSE, NASDAQ, or AMEX and excludes: 1) limied parnership, ) righ s issue, 3) uni issue, 4) closed-end fund, 5) SEOs lacking informaion abou filing dae, issue dae, offer price, filing shares, filing amoun, 6) SEOs wih an offer prices less han $5, 7) SEOs wih more han one issue for he same filing, 8) SEOs whose lag of issue dae compared o filing dae is smaller han 5, or larger han 60 9) SEOs lacking CRSP daily sock reurns for he hree rading days around SEO filings or from he prior 180 rading days o he prior 10 rading days, 10) SEOs wihou one-o-one correspondence beween CUSIP in SDC and idenifier in COMPUSTAT/CRSP. Panel A: Frequency disribuion of SEOs by filing year Cumulaive Cumulaive SEO_year Frequency Percen Frequency Percen 1984 6.75 6.75 1985 51 5.39 77 8.13 1986 58 6.1 135 14.6 1987 41 4.33 176 18.59 1988 16 1.69 19 0.7 1989 9 3.06 1 3.34 1990 4.53 45 5.87 1991 73 7.71 318 33.58 199 69 7.9 387 40.87 1993 75 7.9 46 48.79 1994 37 3.91 499 5.69 1995 51 5.39 550 58.08 1996 5 5.49 60 63.57 1997 31 3.7 633 66.84 1998 30 3.17 663 70.01 1999 30 3.17 693 73.18 000 33 3.48 76 76.66 001 41 4.33 767 80.99 00 44 4.65 811 85.64 003 41 4.33 85 89.97 004 40 4. 89 94.19 005 7.85 919 97.04 006 8.96 947 100.00 Panel B: Frequency disribuion of SEOs by number of offerings Cumulaive Cumulaive N Frequency Percen Frequency Percen 1 573 79.5 573 79.5 107 14.80 680 94.05 3 4 3.3 704 97.37 4 11 1.5 715 98.89 5 5 0.69 70 99.59 6 0.8 7 99.86 7 1 0.14 73 100.00 66
Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 Table.3 Regression of SEO announcemen effec on earnings imeliness This able presens OLS regression esimaes of SEO announcemen-period reurn on earnings imeliness (TL). The SEO sample consiss of 947 filings by 73 firms over he period from 1984 o 006. In he firs 3 columns, I use model-based cumulaive abnormal reurn as he dependen variable. In he las 3 columns, I use markeadused cumulaive abnormal reurn as he dependen variable. The absolue value of saisics is in brackes. ***,**, and * represen 1%, 5%, and 10% significance respecively. Model_CAR Adused_CAR 1 3 4 5 6 REL_SIZE -0.0005-0.0009 [1.35] [0.4] ABS_SIZE -0.0073-0.0071-0.0040-0.0039 [5.17]*** [3.74]*** [.16]** [.09]** MTB 0.0015 0.00 0.00 0.008 0.003 0.003 [.5]*** [3.58]*** [3.51]*** [4.88]*** [5.35]*** [5.9]*** Firm_Size 0.0034 0.0061 0.006 0.0019 0.0035 0.0035 [3.89]*** [5.54]*** [5.58]*** [.8]** [3.]*** [3.5]*** TL 0.0075 0.006 [.01]** [1.71]* Inercep -0.0456-0.0340-0.0356-0.036-0.066-0.08 [7.35]*** [5.17]*** [5.38]*** [5.43]*** [4.15]*** [4.3]*** N 947 947 947 947 947 947 Ad_R 0.016 0.0310 0.034 0.034 0.081 0.0301 Table.4 Frequency disribuion The iniial samples consiss of 495 SEOs by 379 firms from he period of 1984 o 006 lised on NYSE, NASDAQ, or AMEX and excludes: 1) limied parnership, ) righ s issue, 3) uni issue, 4) closed-end fund, 5) SEOs lacking informaion abou filing dae, issue dae, offer price, filing shares, filing amoun, 6) SEOs wih an offer prices less han $5, 7) SEOs wih more han one issue for he same filing, 8) SEOs whose lag of issue dae compared o filing dae is smaller han 5, or larger han 60 9) SEOs lacking CRSP daily sock reurns for he hree rading days around SEO filings or from he prior 180 rading days o he prior 10 rading days, and 10) SEOs wihou one-o-one correspondence beween CUSIP in SDC and idenifier in COMPUSTAT/CRSP. I also require a leas 6 daa poins wihin 8 years prior o he SEO filing dae in calculaing for 6 earnings aribues: imeliness, value relevance, accrual qualiy, earnings persisence, predicabiliy, and smoohness. 67
The Special Issue on Conemporary Research in Social Science Cenre for Promoing Ideas, USA Panel A: Frequency disribuion of SEOs by filing year Cumulaive Cumulaive SEO_year Frequency Percen Frequency Percen 1984 0 4.04 0 4.04 1985 0 4.04 40 8.08 1986 8 5.66 68 13.74 1987 7 5.45 95 19.19 1988 9 1.8 104 1.01 1989 16 3.3 10 4.4 1990 17 3.43 137 7.68 1991 33 6.67 170 34.34 199 40 8.08 10 4.4 1993 39 7.88 49 50.30 1994 6 5.5 75 55.56 1995 34 6.87 309 6.4 1996 9 5.86 338 68.8 1997 3 4.65 361 7.93 1998 16 3.3 377 76.16 1999 14.83 391 78.99 000 16 3.3 407 8. 001 19 3.84 46 86.06 00 3 4.65 449 90.71 003 17 3.43 466 94.14 004 14.83 480 96.97 005 15 3.03 495 100.00 68
Inernaional Journal of Humaniies and Social Science Vol. 1 No. 0; December 011 Panel B: Frequency disribuion of SEOs by number of offerings Cumulaive Cumulaive N Frequency Percen Frequency Percen 1 304 80.1 304 80.1 49 1.93 353 93.14 3 15 3.96 368 97.10 4 9.37 377 99.47 6 0.53 379 100.00 Table.5 Relaion beween SEO announcemen-period reurn and earnings aribues This able presens OLS regression esimaes of SEO announcemen-period reurn on earnings aribues. The SEO sample consiss of 495 filings by 379 firms over 1984 o 006. The dependen variable is he model-based cumulaive abnormal reurn in SEO even period. The absolue value of saisics is in brackes. ***,**, and * represen 1%, 5%, and 10% significance respecively. 1 3 4 5 6 7 8 ABS_SIZE -0.014-0.013-0.0107-0.014-0.015-0.014-0.0116-0.010 [4.33]*** [4.7]*** [3.65]*** [4.34]*** [4.33]*** [4.33]*** [3.97]*** [3.44]*** MTB 0.0057 0.0056 0.0061 0.0057 0.0058 0.0058 0.0059 0.0064 [3.66]*** [3.6]*** [3.9]*** [3.66]*** [3.66]*** [3.68]*** [3.75]*** [4.08]*** Firm_Size 0.011 0.0113 0.0093 0.0111 0.011 0.0109 0.0104 0.0081 [5.73]*** [5.8]*** [4.43]*** [5.69]*** [5.71]*** [5.46]*** [5.17]*** [3.60]*** TL 0.0113 0.0153 [.09]** [.45]** AQ 0.70 0.798 [.47]** [.34]** VR -0.0017-0.0109 [0.5] [1.41] EP -0.0016-0.006 [0.4] [0.41] PRED -0.0013-0.0040 [0.5] [1.47] SMTH 0.0090 0.0047 [1.4] [0.68] Inercep -0.0501-0.058-0.0401-0.0496-0.0500-0.0501-0.0431-0.0355 [5.31]*** [5.56]*** [3.9]*** [5.1]*** [5.1]*** [5.31]*** [4.05]*** [3.13]*** N 495 495 495 495 495 495 495 495 Ad_R 0.0594 0.0657 0.0691 0.0576 0.0576 0.0580 0.0613 0.0758 69