Accounting quality and media attention around seasoned equity offerings

• Date: 06 August 2018
• DOI: https://doi.org/10.1108/IJAIM-02-2017-0029
• Published date: 06 August 2018
• Pages: 443-462
• Author: Fernando Comiran,Tatiana Fedyk,Joohyung Ha
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Accounting quality and media

attention around seasoned

equity offerings

Fernando Comiran,Tatiana Fedyk and Joohyung Ha

Department of Accounting, University of San Francisco, San Francisco,

California, USA

Abstract

Purpose –This paper aimsto investigate how media coverage affects the quality of accountinginformation

for seasonedequity offering (SEO) firms.

Design/methodology/approach –The sample includes SEOs completed between January 1993 and

December 2014 in the USA that are available from Thomson Financial’s Securities Data Company. The

FactSet database was used to measure the amount of media coverage. The paper considers two types of

earningsmanagement: accrual-based earnings managementand real earnings management.

Findings –This study finds that the mediaserves as a watchdog for real earnings management but does

not affect accrual manipulations. These findings hold when endogenous factors affecting firms’earnings

management choices are controlled for and also when alternative time windows for media coverage are

examined.

Originality/value –This paper is the first to demonstrate that media attention affects the quality of

accountinginformation during equity offerings,as it successfully reduces real earnings management.

Keywords Real earnings management, Seasoned equity offerings, Media attention,

Accounting information quality

Paper type Research paper

1. Introduction

Does media coverage influence firms’decisions to engage in earnings management? A

voluminous literature documents the importance of financial media in disseminating

information to market participants and affecting firms’financial performance (Fang and

Peress, 2009;Engelberg and Parsons,2011). Although equally important, the media’s effect

on firms’operational performance is less studied. By exerting pressure for particular

managerial decisions,the media can influence firms’investment in R&D and their quality of

innovation (Hirshleifer et al., 2012), stock option grants to chief executive officers (CEOs)

(Kuhnen and Niessen, 2012) and firms’corporate social responsibility strategies

(Zyglidopoulos et al., 2012). This paperexamines the seasoned equity offering (SEO) setting

to investigate the effect of the media on a key aspect of firms’operationaldecision-making:

earnings management. The study finds that higher media coverage before the offering

corresponds to substantially lower real earnings management (REM) around the offering

but has no significant effect on accrual-basedearnings management.

This paper’s focus on earnings managementis motivated by two factors: the importance

of earnings management to a firm’s performance and the responsiveness of earnings

management to managerial incentives. On the one hand, a large literature documents the

impact of earnings management on shareholder value (Loomis, 1999), innovation (Fedyk

and Khimich, 2017) and future performance (Rangan, 1998;Teoh et al., 1998). On the other

Seasoned

equity

offerings

443

Received27 February 2017

Revised27 May 2017

Accepted23 July 2017

InternationalJournal of

Accounting& Information

Management

Vol.26 No. 3, 2018

pp. 443-462

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-02-2017-0029

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

hand, earnings managementis one of the managerial decisions most susceptible to pressure

from incentives, for example, managers manage earnings to reach bonus benchmarks or to

increase the value of stock option holdings (Healy, 1985), and managers tailor activities

management to the most value-relevant areas (Fedyk et al., 2017). These twofeatures make

earnings management an ideal domain for observing the effect of the media on managerial

decision-makingwithin firms.

Conceptually, media coverage can affect a firm’s incentives for earnings management

through two channels. The first channel is the media’s role as a watchdog, highlighted by

Miller (2006),Kuhnen and Niessen (2012) and Dai et al. (2015). The key prediction of the

watchdog channel (watchdog hypothesis) is a negative correlation between the volume of

preexisting media coverage and the extent of earningsmanagement. The second channel is

the possibility that the greater visibility induced by higher media coverage can create

incentives to report stronger earnings (Dyck and Zingales, 2002;Schrand and Zechman,

2012;Hribar and Yang, 2016). This channel (attention pressure hypothesis) predicts a

positive correlation between a firm’s preexisting media coverage and its earnings

management.

This study tests these channels empirically using the SEO setting. Corporate issuance

events such as initial public offerings (IPOs) and SEOs provide incentives for a firm’s

management to maximize the firm’s perceivedvaluation in the short term (Cook et al.,2006).

The interplay between these strategic incentives and the media is illustrated by Ahern and

Sosyura (2014), who document that firms time their press releases during merger

negotiations in a way that is consistent with the incentives induced by the structure of the

individual offerings(fixed versus floating exchange ratio). The present paper focuses not on

how and when firms choose to reveal information to the media, but rather on the extent to

which firms embellish their earnings given a preexisting media spotlight. The analysis

focuses on SEOs rather than IPOs to observe earnings management both immediately

preceding and immediatelyfollowing the corporate issuance event.

For each SEO considered, this study examines the earnings reported immediately

preceding the offering and the first earnings reported after the offering. The measure of

media attention that is used captures the volume of news articles covering the firm during

six months before each earnings announcement[1].For the outcome variables, both real and

accrual-based earnings management are considered using common proxies from the

literature.

The baseline results support the media-as-watchdog channel for REM but detect, on net,

no impact of the media on accrual-based earnings management. For example, regarding

earnings announcementsin the year preceding an SEO announcement, the results show that

a drop from the 75th to the 25th percentile in the number of media mentions during the six

months before the announcement corresponds to a 6.07 per cent increase in the total REM,

significant at the 10 per cent level. The effect is analogous for the earnings announcement

immediately following the SEO announcement: an increase of 9.43 per cent, significant at

the 1 per cent level. Turning to accrual-basedearnings management, however, the estimated

effect of a drop from the 75th to the 25th percentile in media mentions is statistically

indistinguishable from zero during the period immediately preceding the SEO

announcement, and there is a 1.50 per cent (and weakly significant) decrease in accrual-

based earnings management for the year of the SEO announcement, that is, an increase in

media attention leads to an increase in accrual-based earnings management in the year of

the SEO announcement. Overall, this paper’s analysis suggests that the media plays an

important watchdog function in checking earnings management, but that the scope is

limited to REM.

IJAIM

26,3

444