I examine earnings management around seasoned equity offerings and, consistent with Rangan (J. Financial Econ. 50 (1998) 101) and Teoh et al. (J. Financial Econ. 50 (1998) 63), find evidence of earnings management around the offerings. However, in contrast to their conclusions, I show that investors infer earnings management and rationally undo its effects at equity offering announcements. The investor naı̈veté conclusion of Teoh et al. (J. Financial Econ. 50 (1998) 63) and Rangan (J. Financial Econ. 50 (1998) 101) appears to be due to test misspecification. I conclude that seasoned equity issuers’ earnings management may not be designed to mislead investors, but may merely reflect the issuers’ rational response to anticipated market behavior at offering announcements

The primary goal of this study is to evaluate the ability of the Cross-sectional Jones Model and the Cross-sectional Modified Jones Model to detect earnings management vis-à-vis their time-series counterparts by examining the association between discretionary accruals and audit qualifications. These two cross-sectional models have not been formally evaluated by prior research, and their use may offer certain advantages to investors and researchers over their time-series counterparts. A sample of 173 distinct firms with qualified audit reports and a matched-pair control sample with clean audit reports are used. Only the two cross-sectional models are consistently able to detect earnings management. One limitation of this study is that its findings merely indicate the superiority of the cross-sectional models vis-à-vis their time-series counterparts in an audit qualification setting, not validate either the former or the latter

This paper examines banks’ choice of accounting methods in a new regulatory environment that more closely ties regulatory monitoring to GAAP numbers. The study finds that banks’ choice of the implementation method for SFAS 106 is consistent with an attempt to balance the increased regulatory costs with earnings management benefits. Moreover, banks strategically chose the adoption timing of both SFAS 106 and SFAS 109 to further reduce regulatory costs. The implementation method choice is consistent with a portfolio approach where managers simultaneously consider the existing discretionary accrual levels vis-à-vis the financial reporting effects of impending accounting standards