Conclusions
In this paper, we examine the impact of real earnings management activities on the REITs SEO process to revisit the window of opportunity and risk-return trade-off hypotheses debated in the literature. Particularly, we apply a recently developed liquidity-augmented asset pricing model to measure the liquidity risk for SEO REITs. We focus on firms’ exposures to liquidity risk in relation to the level of real earnings management around SEO to (1) test the role of real earnings management in SEO timing, and (2) examine whether real earnings management will impact SEO REITs’ stock performance.
We find that REITs managers engage in real earnings management to attract more uninformed trading in order to provide the liquidity services at lower cost during seasoned equity offerings. We document that REITs with higher liquidity risk are more likely to manipulate earnings prior to equity offerings and uninformed trading is higher following real earnings management. Firms set the offer price at a smaller discount after engaging in real earnings management and stock returns decline in the long run. The findings are consistent with risk and market efficiency explanations. Overall, our study focus on the effect of real earnings management on the dynamics of liquidity risk around SEO, demonstrating that managing the liquidity risk via real earnings manipulation allows firms to lower their cost of capital at equity issuance.
